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To ask if any NHS staff understand the potential for large tax bills as a result of pay increases due to pension rules?

(50 Posts)
NorthernLurker Tue 09-Apr-19 22:28:10

So I know this has been in the news a bit re doctors and dentists because they are high earners and both the lifetime cap and effect of annual limits being tapered impact on them but what I didn't know is how it could impact on 'ordinary' staff.

My current understanding (and I'd love to be wrong, please say if I am) is I am in the nhs pension scheme. My limit for contributions or increase in value of the pot each year is 40,000. So I make contributions considerably under that but if I get a pay increase through promotion of say £4000 that increase is multiplied by 16 = an increase in pension pot value of £64,000. This generates a tax liability @20% on £24,000 - £4800 - which I apparently would owe HMRC! I can ask for the pension scheme to pay it (if I realise in time) but if so that will be deducted WITH INTEREST from final benefits.

Now happily for me I can carry forward allowance from the previous three years and in this example that should cover this liability BUT if I get another similar increase next year I would be screwed.

Am I right? How widely is this known? And how can it be right that an increase in pay one year can generate a tax bill greater than the flipping increase! I know the final salary scheme is much envied but there's something really punitive about this.

Collectingcpd Tue 09-Apr-19 22:30:18

Can’t comment on your complicated prediction, but as far as I’m aware you can’t be liable if you earn under £110k

SouthernComforts Tue 09-Apr-19 22:34:19

Have you looked at this? It could help: www.nhsemployers.org/case-studies-and-resources/2015/10/annual-and-lifetime-allowance-factsheet-for-employers

chicaguapa Tue 09-Apr-19 22:34:43

You've multiplied your pay increase by 16, but you should have multiplied your contribution (plus employer's). Tbh the administrators should warn you if you're likely to exceed the annual allowance, as they'll check it every year. But it usually only applies to high earners.

memorial Tue 09-Apr-19 22:37:26

That's exactly right lurker. For high earning consultants who give up their family time to do overtime/ extra clinics or surgery etc. They can be hit with tax bills of 40k. For earnings much less than that. It's penalizing people for working more. And many consultants are cutting hours/Not helping cut waiting times or retiring early. Typical of this country punish the hard workers for working hard because how dare they earn a decent income. Utterly bizarre.

hmmmmmmmmmmmmmmmm Tue 09-Apr-19 22:37:58

Why are you multiplying your £4K increase by 16?

memorial Tue 09-Apr-19 22:38:41

Chica the NHS pension scheme administrators do not do this. The only scheme that doesnt

NorthernLurker Tue 09-Apr-19 22:46:31

I'd read about 110,000 but then in the linked document (which I had read) there are examples given of earnings significantly under 110,000. So tha5 confuses me (not hard to do!)

The multiple of 16 is apparently what's used to calculate the final salary benefit. I don't know why!

It seems very difficult to work out if you're affected. The poster who mentioned employer contributions is right I know. It's the final salary element that's the killer, once you multiply even a small increase the allowance is exceeded. As for the impact on medical recruitment and retention......it's a disaster area!

kamelo Tue 09-Apr-19 22:52:47

It doesn't work that way and is quite a complex calculation. It's based on the increase in value of the members benefits from one year to the next not the amount of pay rise.
The only people likely to be affected by this are the highest earners who probably suffer this each year so know about it and those that receive very large (think £10K plus large) pay rises.

Information on this here:
www.nhsbsa.nhs.uk/member-hub/annual-allowance
and:
www.nhsbsa.nhs.uk/sites/default/files/2018-09/Annual%20Allowance%20pension%20savings%20statement%20guide-20180809-(V1).pdf

jacks11 Tue 09-Apr-19 22:57:36

Agreed Memorial

I know colleagues who actually can't afford to take on the overtime they are being asked to do for the Trust on the "waiting list initiatives" to reduce the waiting list time for out-patient clinics and elective surgery. There is some bemusement from the trust/HR as to why people "don't want to take on the extra hours", though I would think it is pretty obvious why. After all- would you pay to go to work and at the weekends/evenings, in addition to your contracted hours at that? Because that is, in effect, what would happen to some people.

I also know several who have retired earlier than they might otherwise have chosen to do as it did not make financial sense to keep working. This may not be such as issue if they were easily replaced. Except they often aren't. In one case I am aware of the post has been sporadically covered by locus's but no permanent replacement has been found. They have advertised several times and had either no response at all or one candidate who is either not suitable or takes another post. In another case of a GP they are still looking to recruit a year down the line.

This is a System is shooting itself in the foot.

kamelo Tue 09-Apr-19 22:58:48

Here is an example I found on a fact sheet I have from a couple of years ago to give you some idea on the calculation.

Whole-time Membership in the 1995 section
CPI @ 3.1%
Pension input period 1 April 2011 to 31 March 2012
Opening Value of pension input period
Step 1
Pension (£125,000 x 15/80) = £23,437.50
Step 2
Pension x 16 = £375,000.00
Step 3
Lump Sum (£23,437.50 x 3) = £70,312.50
£445,312.50
Step 4
£445,312.50 + 3.1% = £459,117.19
Closing Value of pension input period
Step 1
Pension (£127,500 x 16/80) = £25,500.00
Step 2
Pension x 16 = £408,000.00
Step 3
Lump Sum (£25,500.00 x 3) = £76,500.00
£484,500.00
Pension input amount
£484,500.00 - £459,117.19 = £25,382.81
Unused AA (£50,000 – £25,382.81) = £24,617.19

You need to know total member benefit value, years membership, CPI, etc. As I said it's a complicated calculation.

kamelo Tue 09-Apr-19 23:07:00

I'm sorry Jacks, Lurker, that's nonsense. No one pays to go to work but they are in a position where they can choose not to work extra as they don't need the money..

I agree the tax rate of some consultants is high once you top £100K, 60% up to 125K once you take into account losing tax allowance, but seriously, no one is going to feel sorry for a consultant or indeed anyone earning 100k plus for having to pay more tax.

NorthernLurker Tue 09-Apr-19 23:08:34

In that example though salary hasn't increased. From what I can see it's the increase in salary that produces the increase in value of the pension - which is why I'm talking about multiplying that?

Somebody going from a 7 to 8A can easily generate a salary increase of 6 or 7 grand. Two increases through promotion in two or three years can represent a significant increase in the value of the final salary pension.

Oakenbeach Tue 09-Apr-19 23:10:51

So I make contributions considerably under that but if I get a pay increase through promotion of say £4000 that increase is multiplied by 16 = an increase in pension pot value of £64,000

How on earth, or any planet, can the value of your pension increase by £64k in a year as a result of a £4k pay rise? I’m not an expert on the NHS pension (though am a senior finance manager in local government so am familiar with public sector pensions) but unless I’ve misunderstood that clearly can’t be right.

kamelo Tue 09-Apr-19 23:11:46

That's true.
Here's one with a pay rise and exceeding AA. Although CPI is way too high for now.

Calculation 3 – Annual Allowance exceeded due a Promotion
Pensionable service of 25 years at 31 March 2012
Salary of £25,000 at 31 March 2012
Promotion during the pension input period taking salary to £40,000 at 31 March
2013
Whole-time Membership in the 1995 section
CPI @ 5.2%
Pension input period 1 April 2012 to 31 March 2013
Opening Value of pension input period
Step 1
Pension (£25,000 x 25/80) = £7,812.50
Step 2
Pension x 16 = £125,000.00
Step 3
Lump Sum (£7,812.50 x 3) = £23,437.50
£148,437.50
Step 4
£148,437.50 + 5.2% = £156,156.25
Closing Value of pension input period
Step 1
Pension (£40,000 x 26/80) = £13,000.00
Step 2
Pension x 16 = £208,000.00
Step 3
Lump Sum (£13,000.00x 3) = £39,000.00
£247,000.00
Pension input amount
£247,000.00 - £156,156.25 = £90,843.75
AA exceeded (£90,843.75 - £50,000) = £40,843.75

HMRC have published a pension savings Annual Allowance calculator to aid members in
calculating their unused Annual Allowance and establishing whether they have an Annual
Allowance charge www.hmrc.gov.uk/tools/pension-allowance/

kamelo Tue 09-Apr-19 23:14:01

Here's the factsheet, I found it again online.

www.nhsbsa.nhs.uk/sites/default/files/2017-04/Annual%20Allowance%20Example%20calculations%20Factsheet%20v3.0%2010.13%20-%20Copy.pdf

Oakenbeach Tue 09-Apr-19 23:17:09

+ if your pension pot increased by 16x your salary, on a salary of £25k, you’d exceed your lifetime limit in less than 4 years.... I know public sector pensions are generous but literally over 90% of the NHS budget would go on pensions if that were the case!

And if someone is at their lifetime limit, they should just stop paying into a pension, and invest the amount they would contribute elsewhere... They will be incredibly well set up for life.

Complaining about exceeding your lifetime or annual pension allowance is a bit like moaning that your diamond slippers are too tight hmm

NorthernLurker Tue 09-Apr-19 23:27:41

It's the change in value that the annual allowance applies to. A salary increase changes that value because it's a final salary scheme. I'm sorry, I think I'm expressing this really badly but it confuses the hell out of me! Doctors are particularly impacted because of the taper effect but it will impact anybody with a final salary scheme and a significant change?
It may be diamond shoes are too tight but I don't think anybody would relish racking up a tax liability unknowingly from a much smaller salary increase.

Oakenbeach Tue 09-Apr-19 23:41:33

But in your example, it’s not your pay rise you multiply by 16 but the amount by which your pension will have increased as a result of your pay rise.

If you’d worked for 20 years, a £4K pay increase would equate to a 4x(20/80) = £1k pension rise, which is valued as a 16 x £1k = £16k increase in your pension value (plus the impact on your lump sum).... so it’s still potentially an issue (as you’d have to add the pension you’d accrued before the pay rise) but it’s not as stark as you’ve made out.

Oakenbeach Tue 09-Apr-19 23:48:46

And in your example you’d need to be earning over £100k for the increase in your salary before your rise to tip you over.

I have a very good pension pot, but I struggle to feel sorry for someone who’s complaining because the value of their pension has increased well in excess of a typical salary over the course of a year...

NorthernLurker Tue 09-Apr-19 23:49:43

I'm totally befuddled tbh. My op isn't intended to be a statement of fact. I was trying to work through the implications as I understood it <<whimpers>>

NorthernLurker Tue 09-Apr-19 23:52:36

That's not right about the earnings needing to be over 100,000 though. In the example given below its the difference between 25,000 and 40.000 that results in a significant exceeding of the allowance and the allowance is lower now.

MrsArchchancellorRidcully Tue 09-Apr-19 23:58:31

Final salary pension.

Say it slowly, out loud.

Stop moaning and accept what a unique and golden position you are in compared to most.

kamelo Wed 10-Apr-19 00:02:52

Lol It is complicated.
I looked into it a couple of years ago as I was lucky to take a new role with a significant rise and a colleague helpfully told to look into whether it affected me.
You could really do with access to TRS for some figures, whilst the amount of a pay rise matters, your total member benefits value and qualifying years matter equally.

Those who receive a significant pay rise as a one off via promotion will usually able to offset most if not all via carry forward of the three previous years. It will only really affects those who are already earning significant amounts, think band 8(ish) upwards, year upon year.

Think of it like this in a positive way, even after all the calculations you are due a tax bill, be happy your pension benefits have increased by £40K+ whilst only contributing a fraction of that amount. The NHS pension is incredibly good value and not many people realise just how good it is.

Oakenbeach Wed 10-Apr-19 00:04:00

That's not right about the earnings needing to be over 100,000 though. In the example given below its the difference between 25,000 and 40.000 that results in a significant exceeding of the allowance and the allowance is lower now.

That’s because the rise is £15k, not the £4k in your example. I was basing the £100k+ on the £4k. Best to work through the example provided above inserting your figures.

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