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Article:

Annual Allowance tax charges on NHS pension for 2019/20 tax year

17 January 2020

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As seasonal pressure mounted on the NHS in last autumn, much attention was focused on why senior NHS staff were sometime reluctant to work additional hours – with the pension tax rules seen by many as a key factor.

Before the General Election, the Government made a commitment to resolve the issues that NHS staff face in connection with tax charges on their NHS pension rights – aiming to remove the disincentive the current rules create for NHS workers to work extra hours.

The Chancellor announced a ‘quick fix’ for the current tax year with a permanent solution to be introduced in due course following more consultation: this may be part of a wider review of our complex pension tax relief rules during 2020.

How ‘quick fix’ will work

There will be no change to the way the rules work for 2019/20 – so individuals who take on additional hours may trigger an annual allowance charge for the tax year. However, how individuals are affected by the tax charge will change.

On 22 November, NHS Chief Executive Simon Stevens wrote to health leaders to set out how a short term fix would work. The key points are:

  • For pension entitlement accrued under the NHS scheme through work for the NHS, scheme members will be able (as usual) to opt for the NHS pension scheme to pay any tax due under the pension annual allowance rule.
  • Where a scheme pays arrangement is entered into, the NHS employer will commit to pay the individual a corresponding amount on retirement (ensuring they are fully compensated for the impact of the 2019/20 deduction).

It should be noted that the guarantee will apply for the whole 2019/20 tax year (ie even if pension entitlements accrued before 22 November trigger the tax charge) and even if the individual takes on no additional hours this tax year. However, any element of an annual allowance tax charge triggered by accrual of non-NHS pension rights or by additional voluntary contributions (eg ‘additional pension’) will not be covered.

There is more information on these temporary rules at www.england.nhs.uk/pensions

Action required

There is no immediate action required. However, you can now be sure that if you do take on any additional NHS work before 6 April 2020, it should not create an additional annual allowance tax charge on your NHS pension that you have to pay personally: of course, you will pay income tax and NIC on any additional earnings as normal.

If an annual allowance charge arises, after April 2020, you will need to make a ‘scheme pays’ election for 2019/20 which has to be submitted by 31 July 2021. The related paperwork should be retained so that you can ensure you are fully compensated when you retire.

If you have any questions on your personal tax position on your pensions, please get in touch with our team.