Should you make an NHS Scheme Pays election?
The NHS Pensions Agency, on election, may agree to pay some, or all, of your annual allowance tax charges each year. An annual allowance tax charge occurs when the growth in your NHS pension scheme benefits exceeds your available annual allowance. The annual allowance is £60,000 for 2023/24 (previously £40,000). This, however, can be tapered to a minimum of £10,000 (previously £4,000) depending on an individual’s level of threshold income and adjusted income*.
You can ask for a Scheme Pays election, even if you have a tapered annual allowance for that year.
If you have unused annual allowance, from the previous three years, you can offset this against any current year excess.
*For more information on threshold and adjusted income, read our previous blog. However, please note the current figures are threshold income £200,000 and adjusted income £260,000).
Points to note:
- The deadline for submitting a Scheme Pays election is 31 July of the year following the tax year for which the annual allowance charge relates, i.e. for the 2022/23 tax year, the submission deadline will be the 31 July 2024.
- You can elect for NHS Pensions to scheme pay the charge calculated from the growth in both your 1995/2008 and 2015 NHS Pension Schemes.
- NHS Pensions will not pay charges incurred on contributions into any non-NHS pension schemes.
- Scheme Pays is also available where contributions into an NHS Money Purchase AVC scheme exceeds the annual allowance. In these cases, a separate Scheme Pays election needs to be made to the NHS Pensions Purchase AVC scheme. NHS Pensions will not pay annual allowance charges incurred for the AVC scheme and vice versa.
- Scheme Pays elections are irrevocable; once your election has been accepted, it cannot be cancelled at a later date. It can, however, be amended, should the election amount change for any reason, by submitting an SPE2 form.
There are two types of election:
Mandatory Scheme Pays
- There are conditions which, if met, mean the scheme must agree to a member’s request to pay up to the maximum amount of the tax charge on the member’s behalf.
- This is only available if your pension growth is more than the standard annual allowance, your annual allowance charge is more than £2,000 and NHS Pensions received the election before the Scheme Pays deadline.
- All pension schemes must have a mandatory Scheme Pays facility as part of a compulsory requirement by HMRC. In this case, HMRC set the conditions for when an election is accepted.
- NHS Pensions will pay the charge by mandatory Scheme Pays by 14 February following the end of the second tax year to which the liability relates.
Voluntary Scheme Pays
- If the conditions mentioned above for Scheme Pays are not met, then the scheme may pay the annual allowance tax charge on a voluntary basis.
- However, pension schemes are not required to have a voluntary Scheme Pays facility. This enables them to be able to decide the conditions for when it will pay scheme pays under the voluntary facility.
- Where NHS Pensions make payments in relation to a voluntary Scheme Pays, you remain solely liable for the charge and HMRC may charge interest if it’s not paid before the 31 January self-assessment deadline. You are also solely liable for the interest charged.
For both mandatory and voluntary elections, NHS Pensions will pay the charge at the end of the quarter your election is accepted, the final dates for payments being 15 May, 14 August, 14 November and 14 February. This may be after the 31 January self-assessment tax return deadline.
What will this cost me?
When NHS Pensions settle your annual allowance charge following a Scheme Pays election, this isn’t a goodwill gesture, it’s effectively a loan which will be recovered when you retire (or transfer out of the scheme). Note, for NHS Money Purchase AVC scheme elections, the money is taken out of the pension fund as soon as the charge is paid to HMRC.
Once accepted, the Scheme Pays is recorded as a ‘notional negative defined contribution account’ (DC) on your pension record. Then, from the 1 January each year, interest is added onto the election amount.
The interest is based on the CPI (from the September of the previous year) plus, the Superannuation Contributions Adjusted for Past Experience (SCAPE) discount rate**. The current SCAPE rate is 1.7% as of 30 March 2023, reduced from 2.4%.
This is known as the Scheme Pays Cost.
**NHS Pensions reserve the right to change the interest rate amount
How will it be recovered?
At retirement, a permanent deduction to your NHS benefits occurs, totaling the negative DC account balance, plus interest.
- For 1995 section members, this is a reduction in your pension and your lump sum.
- For 2008 section or 2015 scheme members, only your pension is reduced.
If you leave and transfer your NHS pension rights, the transfer value is reduced to recover the negative DC balance.
You may find the following NHS links useful for more information:
How can we help?
We can provide an initial full review of your pension position and then carry out a yearly review so you can plan and manage your pension. If you have any questions, please contact a member of our medical accounting team to discuss.
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