Annual Allowance Tax Charge – Are You Ready?

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money4dentists’ Richard T Lishman asks: “Are you about to be hit with tax penalties?"

With dentists being subject to the tapered Annual Allowance due to their high NHS earnings and with little or no carry forward available, they are being hit with tax penalties due to recent changes in allowances, with some falling due this month. 

These tax charges are something we will see more often and need to inform clients of the position so they can prepare for the deadlines as follows;

Some accountants will complete this assessment on your behalf, although many do not complete this work or don’t have the expertise in this area to assess whether you are subject to these penalties. Due to clients reaching out to us we are now pleased to be able to offer this service which will help them plan and prepare for any pending tax liabilities so you don’t fall foul of HMRC.

What we can do for you?

Review your NHS Annual Allowance Pension Savings Statement (AAPSS)

Produce your Annual Allowance Calculator which will detail the following:

• Your Annual Allowance and if you are subjected to the tapered Annual Allowance based on your earnings,
• If you have any carry forward available,
• Your pension input amount for the tax year,
• If you have exceeded your Annual Allowance,
• And if you have a chargeable amount.

If we have calculated that you have a chargeable amount, we will assess how best you should pay this i.e. we will check to see if you are eligible for mandatory or voluntary scheme pays.

If you are eligible for scheme pays we will administer this for you and calculate the potential pension reduction.

We will liaise with your accountant to ensure both parties have updated details.

We will notify you of the deadlines so that you can avoid any tax penalties on late payments, which is currently 5% of the unpaid tax 30 days after the due date, an additional 5% at the six-month point and a further 5% at 12 months.

What if I exceed my Annual Allowance?

The NHS Pension is such a good arrangement that it would be unlikely to be beneficial to cease membership to the scheme. However, if you exceed your Annual Allowance (after carry forward) you have two options, either pay the tax directly to HMRC or apply for Scheme Pays.

Scheme Pays

You may be able to elect for NHS Pensions to pay some or all of your Annual Allowance charge for you, from the 1995/2008 NHS Pension Scheme or the 2015 NHS Pension Scheme (2015 Scheme). They will only pay the charge if they receive a Scheme Pays election notice within HMRC deadlines and where mandatory conditions are met. These are, that:

1. Pension growth in the 1995/2008 Scheme or the 2015 Scheme exceeds the standard Annual Allowance, and
2. Your total Annual Allowance charge liability, for the relevant tax year, is more than £2,000.
3. Your election form is received by HMRC’s mandatory Scheme Pays deadline. Deadline to apply is before 31st July the following tax year (i.e. 2018-19 = July 2020).

Mandatory Scheme Pays

They will accept an election if all of the following conditions have been met:

1. Your election is received by the deadline; and
2. The pension input amount in the 1995/2008 or 2015 NHS Pension Scheme is more than the standard Annual Allowance; and
3. The Annual Allowance charge for the tax year is more than £2,000 (this is across all of your pension schemes).

Mandatory Scheme Pays can only be used for an Annual Allowance charge calculated from a pension input amount, in the 1995/2008 or 2015 NHS Pension Scheme, that is more than the standard Annual Allowance.

Voluntary Scheme Pays

It is up to individual pension schemes whether or not they want to offer scheme pays, on a voluntary basis, to their members where the conditions for mandatory Scheme Pays are not met.

If you have an Annual Allowance charge occurring in 2016/2017 you are only offered voluntary Scheme Pays if you are a member of both the 1995/2008 and 2015 NHS Pension Schemes and:

1. Your election is received by the NHS by the deadline; and
2. The total pension input amount in the 1995/2008 and 2015 NHS Pension Scheme is more
than the standard Annual Allowance; and
3. The Annual Allowance charge for the tax year is more than £2,000 (this is across all your
pension schemes).

If you have an Annual Allowance charge for tax year 2017/2018 onwards the NHS have extended their voluntary scheme pays to include members who have a reduced, tapered or alternative, Annual Allowance or who have an Annual Allowance charge (across all their pension schemes) of £2,000 or less.

Therefore if:

1. Your election is received by the NHS by the deadline; and
2. You don’t meet the conditions for mandatory scheme pays; and
3a. The pension input amount in the 1995/2008 or 2015 NHS Pension Scheme is more than your reduced, tapered or alternative, Annual Allowance; or
3b. The total pension input amount in both the 1995/2008 and 2015 NHS Pension Scheme is more than the standard, tapered or alternative, Annual Allowance.

It is no longer a condition for voluntary scheme pays that you have an Annual Allowance charge for the tax year of more than £2,000, across all your pension schemes.

The changes from tax year 17/18 onwards means scheme pays can be used to pay a tax charge within the tapered allowance (max £10,000 to £40,000) to standard Annual Allowance. Any charge within the tapered allowance is an extension of voluntary terms.

This means that although the scheme will pay, the charge for any interest due to late payment remains the responsibility of the member. Depending on when an election is accepted determines when the payment can be made by the scheme. Voluntary payments are made to HMRC on a quarterly basis, by 14th February, 15th May, 14th August and 14th November.

For example: if a 17/18 election is accepted in December 2018 – which includes a voluntary element – the payment will be made to HMRC by 14th February 2019. If an election was accepted in March 2019 then the next payment would be made by the scheme by 15th May. HMRC may charge interest on the late payment, as they would expect payment by their self-assessment deadline of 31st January 2019.

The Maximum Amount of Scheme Pays

The maximum amount of Annual Allowance charge you can ask the NHS to pay is the charge which has been calculated from the pension input amount in the 1995/2008 or 2015 NHS Pension Scheme, that is over the standard, tapered or alternative Annual Allowance.

You cannot ask the NHS to pay an Annual Allowance charge you have incurred in another pension scheme. If you are a member of both the 1995/2008 and 2015 NHS Pension Schemes this is the total pension input amount across both schemes.

Scheme Pays and The Tapered Annual Allowance

As a consequence of having a tapered Annual Allowance part of your Annual Allowance charge may not satisfy the mandatory scheme pays conditions.

If you have adjusted income of more than £150,000 this could result in you having an Annual Allowance charge of up to £13,500, if you had a taxable income of £210,000 or more.

This is the part of the Annual Allowance charge on a pension input amount of £30,000, the difference between the tapered Annual Allowance of £10,000 and the standard Annual Allowance of £40,000, and a higher rate of income tax of 45%.

From 2017/2018 you can ask the NHS scheme to pay this part of your Annual Allowance charge by voluntary scheme pays.

Scheme Pays and The Alternative Annual Allowance

Similar to the above, from 2017/2018 you can ask the NHS to pay the part of your Annual Allowance charge calculated from the pension input amount between the alternative Annual Allowance and the standard Annual Allowance on a voluntary scheme pays basis.

How The Cost of Scheme Pays is Recovered

The amount of Annual Allowance charge paid by the NHS Pension Scheme is recorded as a separate account on your pension record, known as a notional negative defined contribution (DC) account.

In basic terms this account is very similar to someone loaning you the money now to pay your Annual Allowance charge which you will then have to pay back, with interest, when you either retire or if you transfer out. At retirement the total account owing, including interest, is converted into a debit amount to be permanently deducted from your NHS pension benefits.

The Scheme Actuary has provided actuarial factors to convert the total account owing into a benefit reduction. Separate factors are provided for ill-health retirement cases to reflect reduced life-expectancy.

These factors are available on the NHS Pension Scheme website.

1995 Section Members
If you are a 1995 Section member your pension and lump sum will be permanently reduced when you retire.

2008 and 2015 Section Members
If you are a 2008 Section member your pension will be permanently reduced when you retire.

Scheme Transition Members

If you are a member of the 1995/2008 and 2015 NHS Pension Schemes there will be a separate benefit reduction in each scheme. The reduction is apportioned based on each scheme’s pension input amount and the combined pension input amount across the schemes.

What you should be aware of when asking for voluntary scheme pays
If the NHS pay all or part of your Annual Allowance charge on a voluntary scheme pays basis you will remain solely liable for the charge until it is paid.

You are responsible for any late payment interest and/or penalties HMRC may charge if the Annual Allowance charge is paid after the self-assessment tax return deadline of 31 January.

The NHSBSA, NHS Pension Schemes and your NHS employer do not accept any liability for interest and/or penalty charges in respect of your voluntary scheme pays election. You must arrange to pay any interest and/or penalties directly to HMRC.

It is important if you are estimating the Annual Allowance charge to provide them with a ‘best estimate’ on the SPE2. Because they pay voluntary scheme pays earlier than mandatory scheme pays this will help reduce the amount of interest HMRC will ask you to pay if you change your election because the Annual Allowance charge to be paid by voluntary scheme pays has increased.

If you decide to pay the tax

If you have an Annual Allowance charge you will need to tell HMRC about this. Members have an obligation to include the Annual Allowance Charge information on their tax return by the following 31 January.

If you normally complete a self-assessment tax return, then you must tell HMRC about your pension savings and liability to the Annual Allowance charge as part of this return. You will need to complete the ‘Additional Information’ pages of the tax return to show the amount by which your pension growth (the total pension input amount) exceeds the Annual Allowance.

HMRC have published a help sheet – HS345 ‘Pensions – tax charges on any excess over the Lifetime Allowance, Annual Allowance and on unauthorised payments’ to assist you when completing your tax return.

Here at money4dentists we have the expertise to provide you with the analysis and answers you need to ensure you are not left with any nasty surprises.

Please contact us on 0845 345 5060 for more information.