2017/18 Scheme Pays Election

With the NHS introducing its new 2017/18 scheme, many healthcare professionals will be affected. Here are some things that you should be aware of before the 31 July deadline.

What is a scheme pays election?

For the NHS pension scheme, a scheme pays election is a notice that you would like the NHS Pension Scheme to pay some or all the Annual Allowance (AA) tax charge on your behalf.

Prior to 2017/18, The NHS Pension Scheme would pay your AA tax charge on your behalf if you met the following two conditions:

  1. Your pension growth in that scheme was above £40,000 and
  2. Your tax charge is not less than £2,000.

However, for 2017/18, the NHS have agreed to also pay charges in the following situations:

  1. Your pension growth is below £40,000 but exceeds your reduced annual allowance for the year.
  2. Your tax charge is less than £2,000.

Should you choose to make an election for the NHS Pension Scheme to pay the tax on your behalf they will then recover the tax by way of reduction to your final benefits.

How is the AA tax charge calculated?

In a defined contribution scheme (a typical personal pension arrangement where you build up an investment fund) this is just a simple task of measuring the amount contributed to the pension.

In a defined benefit scheme, such as the NHS Pension Scheme, however, you must measure the capitalised growth of the pension in the year against the £40,000. Due to the complexities in calculating an NHS pension, particularly for GPs, the annual growth may be affected by the following factors:

  • Your accumulated pension pot;
  • Your annual pensionable pay;
  • The time spent as a practitioner;
  • The time spent in NHS service prior to general practice;
  • Whether you work whole time or part-time;
  • If any added years have been purchased;
  • The Consumer Price Index;
  • An increasing factor provided by the government.

The calculation method is also different in the 1995, 2008 and 2015 schemes.

Will you be affected?

As mentioned above there are a lot of factors that affect your pension calculation, but some indicators that you may have a charge are:

  • High levels of pensionable pay (in the 2015 Scheme, consistently over £135,000);
  • Large increases in pensionable pay;
  • Increases in whole time equivalent pay on an officer position;
  • Changes in shift patterns;
  • If you are affected by the Tapered Annual Allowance.

The Tapered Annual Allowance

From 6 April 2016, a further restriction in the AA limit was introduced. The measure was targeted at higher earners and restricts their AA from the standard £40,000 to £10,000 as a minimum for a pension input period (PIP). PIPs are aligned with the tax year for 2015/16 onwards.

To become subject to the tapered AA, an individual must meet both of the following conditions:

  1. Your Threshold Income is above £110,000 and
  2. Your Adjusted Income is above £150,000.

Threshold income is your total top line taxable income, less certain reliefs. The reliefs include losses and loan interest but for most GP clients the biggest deduction will be the superannuation relief. As GPs pay both the employer and employee, and possibly added years, contributions, this deduction could be significant. If the threshold income is over £110,000 then the second test is applied. The test involves calculating your capitalised growth in the NHS pension and adding this to the threshold income. If this exceeds £150,000, then for every two pounds it is exceeded the AA is reduced by one pound down to a minimum of £10,000.

What are your options?

If you think that you may be affected, then you have three options:

  1. Wait for the NHS to provide statements
  2. Calculate the tax charge
  3. Submit an estimated Scheme Pays Election

To discuss your options further, get in touch with one of our Independent Financial Advisers on 01903 534587.