The annual allowance is a threshold which restricts the amount of pension savings you are allowed each year before tax charges apply.
The standard annual allowance is currently £40,000.
Tapered annual allowance 2020/21
- If your threshold income is above £200,000 and your adjusted income is below £240,000 you will be subject to the standard annual allowance.
- If your threshold income is above £200,000 and your adjusted income is above £240,000 then your annual allowance will be reduced. For each £2 that your adjusted income exceeds £240,000, your annual allowance threshold is reduced by £1. If your adjusted income exceeds £312,000 or over then you will have a reduced annual allowance of £4,000 only.
- If your threshold income is under £200,000 you will not be subject to the taper irrespective of the level of adjusted income.
The pensions agencies issue statements at the beginning of October relating to the previous tax year. Statements issued in October 2020 will relate to pension growth in the 2019/20 year. This will not be the case for GPs due to the certification process timeline and statements issued in 2020 are likely to relate to 2018/19.
Scheme members who are GPs can expect to receive a statement for the 2019/20 years in July 2021 following submission of the 2019/20 certificate of pensionable profit/type 2 forms.
The NHS pension scheme will not necessarily know if you are subject to tapering and if you are subject to the taper you should request a statement.
NHSBSA (England and Wales) and the HSC (Northern Ireland) will automatically issue statements if the combined growth between the 1995/2008 and 2015 schemes exceed the standard annual allowance.
The SPPA (Scotland) is currently unable to issue combined statements and you will need to request statements to ensure that your combined growth does not produce a tax charge.
What your statement includes
The scheme will provide you with details of the current year's growth details and that of the three previous years. Unused allowance in these years may be carried forward to offset any tax charge. The relevant limit will be detailed against each year (when the limit was previously greater).
Pension input start date
Pension input start date indicates the beginning of the year being assessed.
Pension input end
Pension input end date indicates the end of the year being assessed.
Annual allowance details the actual or notional limit during the period.
Pension input amount
Pension input amount details the growth in NHS benefits during the PIP (pension input period).
Ensuring your statement is right
Hospital doctors in the 1995/2008 sections
- The benefits will be calculated with reference to your years of service (including any added years or additional pension) and your pensionable pay (this figure will have been provided by your employer).
- You may wish to query this if you have received lump sum arrears for pay awards, increments or pensionable CEA which were paid in the current year but should have been paid in a previous year.
- You can request details of your service record and a breakdown of the calculations from the scheme administrator - these need to be checked as they form the basis of the calculation of pensions growth.
GPs in the 1995/2008 sections
- The benefits will be calculated with reference to your earnings (after allowing for inflation proofing) and will include any added years or additional pension purchased.
- You can request details of your dynamising sheet (a record of GP earnings) and a breakdown of the calculations from the scheme administrator - these need to be checked as they form the basis of the calculations of pension growth.
- You may require the assistance of your accountant to verify the figures.
Members of the 2015 scheme
- Your benefits in the 2015 scheme will be calculated with reference to each years pensionable earnings.
- If you do not have a break in pensionable service of five years or more, any benefits in the 1995/2008 will continue to be linked to current pensionable pay (hospital doctors) or in line with the consumer prices index plus 1.5% (GPs).
- If you have had a break in pensionable service of five years or more the ‘final salary’ link is broken in relation to your 1995/2008 benefits and your 2015 benefits will only receive active revaluation for service since the break.
If you believe that the statement is incorrect you can ask for details of the service and pay that it is based on. If this proves the statement to be wrong you can request another one based on your correct details. The deadlines will not necessarily be extended to allow for this.
Receiving a backdated pay award
If you have received a backdated or late pay award you should contact your employers pensions/payroll department to ensure that your pension records are amended to reflect what your pensionable pay should have been had you been paid correctly on time.
If this is not done, the increase will count against your annual allowance in the year it is paid.
Other genuine errors (eg payroll identifying an underpayment in your agreed pay and correcting it at a later date) can also be allocated to the year(s) in which they should have been paid.
Should you be financially disadvantaged by any errors made by your employer you may be able to seek compensation and should contact us.
I have exceeded the limit. What happens now?
- You will only need to pay additional tax if you have insufficient carry forward allowance to offset the excess over the limit from the three previous tax years.
- You are able to carry forward any unused allowances from the three preceding years to offset the excess.
- If you still exceed the carry forward limit, you need to add the excess amount to your taxable income and you will pay tax at your marginal rate.
- You can opt for the scheme pays method of repayment.
- In all cases you can pay the charge through the completion of a self-assessment tax return.
- You are able to use voluntary scheme pays where your excess growth is above your individual tapered limit but not necessarily above the standard £40,000 limit and the above other qualifying conditions are met.
- You are able to use Mandatory scheme pays where your excess growth is above the standard £40,000 limit.
Alternative options for pension contribution
Active members of the NHS pension scheme who are affected by the annual allowance or lifetime allowance can either:
- continue in the NHS scheme and bear any additional tax charges that arise
- opt out of the NHS scheme and be paid a separate cash payment.
For more information on opting out of the scheme, please see our guidance on the pension contribution alternative reward policy below.
When you have a tax charge, you can elect for the scheme to pay the charge on your behalf. This election needs to have been received by the scheme administrator by 31 July following the January in which the annual allowance charge must be declared on the tax return (eg 31 July 2020 for the 2018-19 PIP). Remember, you cannot change your mind about this decision but the amount detailed for scheme pays can be amended within the next four years.
Electing for the scheme to pay the charge will result in a reduction to your pension at retirement (and to the lump sum for 1995 section members).
The scheme actuary will apply interest at consumer prices index plus 2.4%. This interest is calculated from the January after the receipt of the scheme pays election until retirement. The actual reduction then applied to your benefits will depend on when and why you retire.
- The benefits payable to your dependants will be unaffected and will be based on your accrued benefits before making any reduction for scheme pays.
- The capital value of your NHS benefits will be calculated using the reduced amount payable to you after allowing for the scheme pays selection.
- You can use scheme pays again in future years, but you should make sure you have enough money for retirement.
- HMRC provide no protections for annual allowance.
- For 2019/20 NHS England and the Welsh Government have agreed to meet the cost of scheme pays for clinician members of the NHS pension scheme. This means that electing to pay any annual allowance charge by this method for 2019/20 will not result in any reduction to your pension for this year. NHS England/Welsh Government will repay the reduction made to you at retirement.
- Scheme pays can only be chosen before retirement.
- Part 1 - introduction to the 19/20 scheme pays scheme
- Part 2 - calculating if you have an AA liability with the HMRC calculator
- Part 3 - applying for scheme pays using the BMA template / SPE2 form
- Part 4 - applying for scheme pays using the supplementary form
If you are a deferred scheme member
If you have been deferred through the entirety of a pension input period (1 April to 31 March in relation to the NHS) then the annual allowance rules will not apply to you. If you have only been deferred for part of an input period then the rules will apply for the period of active membership.
Even where you have been deferred for a full input period you continue to have carry forward for that year to use against future growth (assuming it falls to be carried forward as part of the last three years).
This modeller will provide an accurate estimate for your pension if you are a consultant or SAS doctor in the 1995, 2008 or 2015 schemes. It will estimate your annual allowance and lifetime allowance charges.
View our guidance slides for consultants in England, Wales and Northern Ireland, and consultants and GPs in Scotland.
These slides explain:
- pensionable and non-pensionable pay
- the complexities of NHS pension schemes
- retirement, ill health and death in service
- lifetime and annual allowance
- why taxation is an issue for consultants and the NHS
- what the consequences are
- what the BMA is doing about it
- dependants’ benefits.