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Fewer than one in ten NHS staff forced into pension tax penalty take advantage of ‘scheme pays’ option


Fewer than one in ten NHS staff forced into a tax penalty on their pension are taking advantage of the ‘scheme pays’ option which sees their employer meet the cost, new data shows.

A freedom of information request from Quilter shows that on average nearly 17,000 NHS staff breach the annual allowance on pension contributions each year.  But only 1500 take advantage of the ‘scheme pays’ option.

In 2014/15 when the annual allowance was cut to £40,000, nearly 21,000 staff in the NHS pension scheme breached the annual allowance, but fewer than 350 individuals asked the scheme to pay. The gap means under 2% took advantage of scheme pays in that tax year.

The annual allowance affects individuals savings into a pension and restricts the amount they can save tax free in any given year. The annual limit was in excess of £250,000 as recently as 2010/11. But it has since been cut dramatically and now stands at just £40,000.

A tax charge is applied at their marginal rate of income tax on any pension contributions over the annual allowance. 

Public sector workers are particularly vulnerable because of their defined benefit (DB) pensions. This is due to the way benefits accrued under a DB pension are calculated, and means NHS staff receiving a pay rise can easily see their pension contributions docked under an annual allowance tax charge.

This is particularly problematic for higher earners that are hit by the tapered annual allowance. It brings the maximum pension contribution before taxes apply to just £10,000 per year.



Members exceeding the annual allowance

Scheme pays elections



























Source: NHS Business Services Authority, FOI

Ian BrowneIan Browne, pensions expert at Quilter says:

“The annual allowance is really complex anyway, and then when you add the tapered allowance on top things can get really muddy. It is the consequence of an intricately layered tax system that is in need of simplification.

“Anyone that may be affected by an annual allowance charge should think about seeing a financial adviser. They can help ensure you are making the most of your tax allowances and could save you huge sums.

“Likewise, the NHS should ensure it promotes the scheme pays option clearly as it seems thousands of eligible members may be unaware it even exists.

“Public sector DB pensions are under all kinds of pressure at the moment, with separate legal cases from the British Medical Association, Firefighters and others claiming age discrimination against schemes that revised benefits down for younger members. If overturned, this could put great pressure on government, which has set aside £30bn to cover the cost already.

“Additional complications like processing scheme pays applications just add to the weight of pressure on public sector DB schemes.”

For more information contact

Michael Glenister020 7778 963807469
Alex Berry023 8072 626007741

Notes to Editors:

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