NHS pensions annual allowance charge compensation policy

It seems a very long time ago but back in 2019 one of the main medical-related news stories was the impact the tapered annual allowance was causing on doctors’ willingness to continue or increase their workloads. Clinicians were refusing extra work and responsibilities for fear of suffering very high annual allowance charges.

The longer-term government solution was to increase the tapering limits significantly and this was implemented for tax years 2020/21 onwards, with the Threshold Income and Adjusted Income limits, both increasing by £90,000 to £200,000 and £240,000 respectively. This took the majority of doctors out of the scope of tapering. Whilst annual allowance charges can still be an issue, most now will retain the standard annual allowance of £40,000.

Before the changes were made an interim measure was introduced for NHS England and NHS Wales in respect of pension inputs in 2019/20. This policy effectively covered all annual allowance charges suffered by clinicians in the NHS scheme for tax year 2019/20 with the exception of those relating to AVCs.  

NHS clinicians will still need to calculate any annual allowance charges for 2019/20 in the normal way. To ensure they benefit from the special measures they then need to declare the charge on their tax returns by 31 January 2021 deadline and elect for scheme pays (using form SPE2). The scheme pays deadline is 31 July 2021. 

Where a member doesn’t have all the information to calculate their charges (this will primarily be the case for GPs) they should make an estimate of the annual allowance charge on their tax return and in the scheme pays election. The scheme pays election can be amended for up to four years following the usual scheme pays election deadline.

Members must then complete the Annual Allowance Charge Compensation Policy Application Form. The NHS England form and guidance is available here. The equivalent form for NHS Wales is expected to be issued shortly.

The form allows clinicians to apply to receive contractual payments in retirement equivalent to any reduction in pension due to annual allowance charges incurred due to pension inputs to the NHS scheme in tax year 2019/20. The compensation application form needs to be completed by both the member and their employer with the deadline of 31 March 2022.

The compensation policy only applies to NHS England and NHS Wales. Clients who are members of the NHS Scotland Scheme will have to pay any annual allowance charges for 2019/20 in the normal way either directly to HMRC themselves or using the scheme pays option.

Despite the increase in the tapering limits for tax years 2020/21 onwards, senior clinicians are still likely to need help with their annual allowance charges and calculations. Any significant increase in earnings such as the receipt of a national merit award will lead to very large pension inputs which can be well in excess of the £40,000 annual allowance. 

In addition, as with all the main public sector schemes, the NHS scheme will be subject to an age discrimination rectification.  This will mean that many members of the scheme will be offered to the option to revert back from the 2015 Section of the scheme to the 1995 Section for what is known as the remedy period which runs from 1 April 2015 to 31 March 2022.  The result of this will mean that many members will need to recalculate their pension inputs and any annual allowance charges for this period which may include amending the compensation claims for 2019/20.  

This will all need to be resolved once the outcome of the consultation is finalised, for now, the key thing is to ensure relevant members make their scheme pays elections and complete their compensation application forms within the relevant deadlines.