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NHS Pension Scheme – Annual Allowance and Covid-19

After doctors left the NHS Pension Scheme in droves due to the tapered allowance rules, many are returning following changes instituted because of COVID-19.

This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice. 

Not only were the tapering thresholds adjusted earlier this year in the new budget, but as an incentive to get doctors back to work during the coronavirus pandemic, the government reinstituted the ability to receive full pension payments temporarily.

What has changed for the NHS Pension Scheme?

One of the main reasons many are opting back into the scheme is the enhanced death in service benefits it provides, which are incredibly enticing during the global pandemic. Thanks to the budget changes, most members will be able to be in the scheme for a few months, up to a year, without incurring considerable annual allowance charges.

Tapered Allowance

Beginning in 2016, high-earners, including a disproportionate amount of doctors, were affected by the newly introduced tapered allowance; many had allowances reduced to just £10,000 under these rules.

Essentially, the allowance was reduced by £1 for every £2 you earned over £150,000, with a £10,000 minimum. It wasn’t so straightforward though, as the calculations used to work out your income were complicated — gross income minus personal contributions to a pension needed to exceed £110,000 and adjusted income (gross income plus employer pension contributions) needed to exceed £150,000.

You were allowed to roll over any unused allowances from up to three years prior, but at this point, you’d probably have already exhausted your carry forward abilities.

The issues resulting from tapering

Over the past few years, high-earners ran into trouble as the NHS Pension Scheme is a defined scheme linked directly to salaries and income, so they weren’t able to lower their contributions to avoid breaching the threshold and often people had no idea they were going to do so.

The result? A surprise tax bill that forced many doctors to find alternative ways to pay or they’d risk their pension benefits being reduced. In an effort to avoid that, many withdrew from the scheme or severely cut back their working hours.

2020 changes

When the new budget was announced in March, changes to the tapered allowance rules were introduced. The tapering threshold increased from £110,000 to £200,000 and the adjusted income threshold increased from £150,000 to £240,000. With the higher limits, there should be fewer doctors affected.

However, the tapered annual allowance can now go as low as £4,000 for those earning £312,000 or more – a significant reduction, but one that shouldn’t affect as many scheme members as the old rules.

Besides the new rules, the government has also extended the deadline to pay your tax bill to NHS workers. In an effort to support the front line workers, you now have until 31 March 2021 to pay.

Work with a pro

Calculating taxes, contributions, and adjusted income is a complex task, and the consequences for getting things wrong is a hefty tax bill at the end of the year. The best way to ensure you’re prepared is by reaching out to a financial professional. We perform these services for our clients free of charge, so there’s no reason not to seek a helping hand.

Taking care of doctors’ financial affairs for over 30 years – Darren Scott-Guinness is an expert in the field, working with hundreds of doctors to help them understand and work on ways around the NHS pension issue. Get in touch today.

Can we help with your pension?
Investments | Financial Planning | Retirement | Save Tax | Protection |

Dental & Medical Financial Services have been helping doctors and dentists to build and protect their wealth, whilst saving tax for over 25 years.
Call Darren to discuss your options.

Tel: 01403 780 770


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