More time to pay pension tax bills

By Edie Bourne

Doctors facing large tax bills caused by breaching strict annual pension savings limits in 2018-19 now have longer to apply for help to pay the charges.

The voluntary ‘scheme pays’ application deadline has been extended from 31 July to 31 Oct­ober 2020 for tax bills arising in 2018-19. The extra three months is to assist healthcare workers to avoid missing the annual deadline during the Covid-19 response.

When individuals elect to use ‘scheme pays’, the NHS Pension Scheme pays their annual allowance tax bill to HM Revenue and Customs (HMRC) on their behalf, with the member’s benefits in retirement being reduced accordingly. 

Patrick Convey, technical director at specialist financial planners Cavendish Medical, said this move would be welcomed by doctors facing successive annual tax bills through self-assessment – particularly at a time when they were facing extraordinary challenges. 

‘Many have also seen private practice income fall in recent months, so using “scheme pays” rather than finding cash to pay substantial tax bills may be a relief,’ Mr Convey said. 

‘There can even be tax advantages to using “scheme pays” and reducing your eventual future benefits – but be mindful that the interest payments can escalate quickly and the future Consumer Price Index inflation rate is unknown.’

There are also other payment options. Some personal pension schemes will allow payment of the annual allowance charge, which can be tax-efficient and protect the member’s NHS pension.

Mr Convey added: ‘Year on year, more doctors are breaching the annual allowance because the new tapered version means that some can only enjoy yearly pension “growth” of £10,000. 

‘This will reduce to just £4,000 a year for the highest earners in 2020-21. This figure is easily achieved with NHS pension growth before considering any contributions to private pensions.

‘It’s essential that doctors clarify their own status, and the best route forward, in good time. We have even seen cases where the annual allowance sums calculated by the NHS computers have been wrong, making the resulting tax charge incorrect too. Please seek help with this issue – pensions savings limits and tax relief are particularly complex.’

In 2019, HMRC revealed that the number of savers receiving tax bills for annual allowance breaches in 2017-18 jumped by more than 40% to 26,500. In total, £812m of cash paid into pensions breached the annual allowance that year, up from £578m the previous tax year.