The NHS pension – don’t get caught out by the tax rules

NHS pensions have attracted considerable media attention recently as increasing numbers of senior NHS employees find themselves facing large tax bills for breaching pension allowances. In this article, we look at the issues and what you can do to give yourself the best chance of achieving your retirement goals.

The NHS pension is regarded as one of the best workplace pension schemes, but it can be especially complex and is subject to regular changes. This often means that NHS professionals are caught out by surprise tax charges, or are unsure if they will achieve their retirement goals.

The difficulty with calculating the annual allowance

The annual allowance for pensions is £40,000 for many people, but this tapers down to a minimum of £10,000 for those with more than £150,000 of income. However, some people struggle to calculate their total income – and therefore their reduced allowance – because it doesn’t just include their salary.

When calculating their income, NHS professionals also need to consider:

  • Extra sessions or clinics
  • On call availability supplement
  • Discretionary points
  • Income from rental properties, dividends or other savings

Common reasons for exceeding the allowance

Regardless of how much income they receive, many higher earners will breach the annual allowance simply because their automatic contributions take them over their allowance. But any NHS professionals could be at risk of doing so if:

  • They work additional sessions or clinics
  • They receive a promotion or Clinical Excellence Awards payment
  • They make extra contributions into their NHS or personal pension
  • There are changes to Consumer Prices Index (CPI) inflation, which can affect their annual pension growth

A surprise tax bill?

The NHS Pension Authority will write to you if the amount of your NHS pensionable earnings suggests that you may have breached your annual allowance. However, this will not take into account your other earnings – so there is no guarantee that you will receive a warning if you have other sources of income. And as it is your responsibility to declare any breaches and pay any tax due, this can cause problems further down the line.

All of this means that many NHS professionals actually have a lower annual allowance than they expected, and they often exceed the allowance without realising. They end up with a surprise tax bill, which can then eat into the money that they were expecting to enjoy in retirement.

Managing the lifetime allowance tax charge

The lifetime allowance is the amount of benefits you can build up across all of your pensions without paying a tax charge. It is currently £1.055 million. Calculating your lifetime allowance, and whether you are likely to exceed it, can be a challenge. This is especially true for people with a combination of defined benefit (final salary) and defined contribution (money purchase) pensions, and those looking to calculate the historical values of their pensions.

If you have breached your lifetime allowance, or are worried about breaching it in the future, opting out of the NHS pension scheme may not be your best course of action. Employer contributions will increase the value of your pension without any extra cost to you and although you may be subject to a lifetime allowance tax charge, a taxed benefit is better than no benefit at all. However, in many cases contributions come from both you and your employer and the most beneficial amount for you to contribute will depend on the percentage split between the two.

Tilney can help you

At Tilney we have specialist financial planners who help NHS professionals with the challenges faced when it comes to pensions and retirement planning. Why not book an initial consultation to see how we can help you. There is no charge for this consultation and you are under no obligation to sign up for any of our services.

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Important information

Prevailing tax rates and reliefs depend on individual circumstances and are subject to change.

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