Members of the NHS Pension Scheme could receive a tax bill if their pension savings exceed limits set by HM Revenue and Customs (HMRC). These limits are known as the annual allowance, which is calculated each year, and the lifetime allowance, which is calculated based on overall pension savings.
This page contains the following information.
What is the annual allowance?
The annual allowance is the amount of pension savings an individual can make in one year before receiving a tax charge. The standard annual allowance limit has been set at £40,000 since 6 April 2014. Employees may be subject to a lower tapered annual allowance, depending on their taxable income.
If an individual’s pension savings are more than the annual allowance (in one scheme year), they will receive a tax charge on the additional amount. The tax rate charged will reflect the individuals marginal tax rate.
It is possible to carry forward any unused annual allowance, provided the individual was a member of a qualifying pension scheme, at some time during all of the three previous tax years. An individual can carry forward unused annual allowances for a maximum of three years.
Tapered annual allowance
The tapered annual allowance was introduced in April 2016 with the intention of reducing pension tax relief for high earners. It applies to those with adjusted incomes (taxable income and pension savings) of over £150,000 and threshold incomes (taxable income excluding the value of pension savings) of over £110,000.
The rate of reduction in the annual allowance (from the current maximum of £40,000) is by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000 at £210,000. This means an individual's tapered annual allowance will be between £40,000 and £10,000.
Benefits are tested against the tapered annual allowance by applying a factor of 16 to the increase in the benefit (the pension input amount) over the year.
What is scheme pays?
The scheme pays option allows members to ask their pension scheme to pay their annual allowance tax charge to HMRC on their behalf. In return, the member’s benefits in retirement are reduced by a corresponding amount. Scheme pays may be attractive to staff who don’t have the funds available to pay their annual allowance tax charge upfront.
Scheme pays is available to all members of the scheme who breach the annual allowance and incur a tax charge, including:
- high earners who are subject to a lower, tapered annual allowance
- employees who incur a tax charge below £2,000.
Employees must notify NHS Pensions of their intention to use scheme pays before the relevant annual deadline for each tax year. Members planning to use scheme pays for a tax charge relating to the 2017/18 tax year, must submit their request to NHS Pensions before by 31 July 2019. The scheme pays election notice form is available to download from the NHS Pensions website
Further information about scheme pays is available on the NHS Pensions website.
What is the lifetime allowance
The lifetime allowance is the total amount that an individual can have in all their pension savings, during their lifetime, without incurring a tax charge. The lifetime allowance limit is currently £1,030,000 for the 2017/18 tax year and will be increased in line with the consumer price index (CPI) to £1,055,000 from 6 April 2019.
If an individual’s total pension savings exceed the lifetime allowance, a tax charge may be incurred on any benefits in excess of the allowance. Any lump sum taken will be taxed at 55 per cent and pension will be taxed at 25 per cent.
Implications for members
Staff need to be aware of their total pension savings. They need to consider their personal circumstances and how they would like to manage their pension savings, including actions they may wish to take in relation to annual and lifetime allowance limits.
Implications for employers
Traditionally, it has been considered that a small number of NHS staff may be affected by the annual and lifetime allowances. Recent reductions to both allowances mean that more staff may be affected. The overall reward package you offer to your employees includes access to the NHS Pension Scheme (or an alternative scheme under auto-enrolment regulations). Exceeding the annual or lifetime allowances could affect the amount of pension your staff receive in retirement, thereby reducing the overall reward they receive for their employment.
It is important that employers are aware of the rules surrounding the annual and lifetime allowances. More detail on the pension tax allowances is available in our annual allowance briefing and comprehensive guide which includes examples of when an individual may breach the allowances, the impact of any NHS pay changes and considerations for employers.
Supporting staff to make informed pension decisions
To support your workforce to understand the potential implications of annual and lifetime allowances, you need to know which members of your workforce could be impacted and:
- communicate with your workforce about the potential implications of breaching annual and lifetime allowances
- signpost staff to further information and resources to help them plan their pension savings.
You can support and signpost staff to further information and highlight the options available to them, however, you should not offer advice on what action the member should take.
Our pension presentation pack includes a chapter on pension tax issues, with presentation slides and speakers notes to help you explain the annual allowance and lifetime allowance to staff.
Read, download and share our briefings to support your conversations with members of the NHS Pension Scheme about annual allowance
and lifetime allowance
Our comprehensive guide includes examples of when an individual may breach the allowances, the impact of any NHS pay changes and considerations for employers.
NHS Pensions has an annual allowance web page and a lifetime allowance web page with further information and frequently asked questions. It also provides fact sheets on both annual and lifetime allowances on its tax information web page.
HMRC has two annual allowance calculators on its website which give an indication of whether an individual may be likely to breach the annual allowance limit in any one year.