Exceeding the annual allowance has become quite the headache for many dental and medical professionals. The tapered annual allowance hits hardest individuals with high incomes – suffering annual tax charges on contributions and a lifetime tax charge on benefits.
This does not constitute advice and advice should be sought in all instances before acting on it.
The latest figures from the government reveal that in 2017-18 the number of NHS scheme members that needed to use their pension scheme to pay for their annual allowance breach tripled from 2016-17 increasing from 1,126 to 3,869.
This means that out of 12,655 members, about 30% used the scheme pays facility. This is not just down to doctors or dentists – since the annual allowance was reduced to £40,000 five years ago, 17,000 NHS staff members, on average, have exceeded their annual allowance.
Are you aware of the NHS scheme pays?
While there are definitely more members taking advantage of this tax-paying solution, they are by no means the majority. In fact, some financial professionals insist that the pays scheme needs to be promoted more because many members might not even be aware of the new option.
Recent rule changes
This surge in the scheme pays usage may be down to the recent rule changes that allow savers to settle any tax charge over £2,000 through the pension fund, needing not to worry about having the funds to reconcile their bill upfront. This new mandate is quite the change considering the fact that NHS scheme members could previously only ask for the tax on any surplus of the allowance of £40,000 to be taken from their pension.
The rule change came in response to the exodus of members leaving the pension scheme after the tapered annual allowance changes went into effect in 2016. It might still not be enough though, as the number of members leaving the pension scheme was five times higher than their public pension counterparts as recently as December.
These statistics may only grow worse as scheme members have until July to apply to use scheme pays. If you chose to make a payment before the end of March, you would have dealt with 2.8% interest in excess of inflation, but from April onwards this dropped to 2.4%, plus consumer price index. Those opting to pay through their pension will pay interest and have their benefits adjusted upon retirement.
Long-term consequences for short-term benefits
The convenience of using scheme pays is something that dental and medical professionals will need to consider against the long-term consequences of reducing their pensions.
The continued use of this option each year will only eat more into a pension pot, compromising the lifestyle many people hope to live in retirement.
If you’re struggling to come up with a plan to pay your tax bill, working with a professional is your best bet. Experts insist the tax system has become far too complicated and is in dire need of an overhaul. By working with a financial advisor, they can advise on and help you pursue other options so you won’t need to completely rely on scheme pays, such as using self-assessment for all or part of the payment. Advisors can also make sure you’re taking advantage of all the benefits and relief you’re entitled to, both personally and professionally.
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