The Finance Act 2011 introduces revised arrangements to restrict pension tax relief including a reduced annual allowance and a reduced lifetime allowance.
Resources for employers
NHS organisations should carry out a local risk assessment to fully assess the impact of the arrangements on their organisation. To help employers, the NHS Employers organisation has developed a number of risk assessment tools.
Summary of the new pensions tax regime
HM Revenues and Customs have confirmed that:
- From April 2011 the annual allowance (AA) for tax-privileged saving will be reduced from its current level of £255,000 to £50,000. Where the value of a member’s pension benefits any year increases by more than the new AA, they will be charged tax on the excess at their marginal rate. Individuals will be allowed to offset contributions exceeding the annual allowance against unused allowance from the previous three years. For those individuals who see a very significant increase in their pension rights in a specific year, the legislation allows for the tax charge to be paid from their pension rather than current income.
- The lifetime allowance will also be reduced, from its current level of £1.8m to £1.5m, effective from April 2012.
Impact of the new arrangements
- HMRC estimate that 85 per cent of public service pension scheme members will be unaffected by the changes
- However, the impact will be greater for NHS Pension Scheme members because of the numbers of higher earners it covers
- It is expected that members earning less than £45k pa will be completely unaffected. However, some 30 per cent of members earning between £100-150k pa and nearly all members earning over £150k pa will be affected.
The following links set out further detail of the arrangements and include illustrative examples of pension benefit value and tax charge calculations for a range of NHS Pension Scheme members. NHS Employers organisation has also developed a number of risk assessment tools for employers.
Who will be affected by the tax arrangements
Calculating annual increases in pension value and the tax charge
Examples of pension benefit value and tax charge calculations
Helping higher earners to pay the tax
Risk assessment tools for employers
- Pension contribution tax relief arrangements