Tax returns are due at the end of this month (January 31). HMRC imposes a £50k annual allowance on pension contributions. To know whether you’ve exceeded this, your accountant needs your ‘deemed contribution’ figure from NHS Pensions – which is supposed to be sent to you six months after the end of the tax year. Unfortunately, in many cases deemed contribution figures have still not been sent out. This means your accountant will not know whether you’ve exceeded the annual allowance when it comes to submitting your tax return.
You cannot work out the ‘deemed contribution’ figure yourself. Only NHS Pensions can do this. You can ask them for the figure or your adviser will do this on your behalf. When the deemed contribution figure is known, you could be owing tax to HMRC and be charged interest on the amount. Not only will a revised tax return be required but also you must decide whether to pay the unpaid tax upfront or defer payment by way of deductions to your NHS pension at retirement.
The dentist in table 1 received ‘carry forward’ relief for not fully using the annual allowance in the previous three tax years, however, their cumulative position means a charge is still applied.
This dentist is liable for a tax charge on the excess, equal to the rate of tax relief that the pension contributions received in the first place. Alternatively, this dentist could opt to defer payment of the tax charge and ask NHS Pensions to pay this by way of a deduction from retirement benefits. In this case, deferment of the total outstanding tax charge (£3,175 + £3,328 = £6,503) would result in an NHS pension reduction of £228 p/a from age 60. Although this amount seems modest, remember
that the penalty could be levied for every year of NHS service where the allowance is repeatedly breached. This dentist has 20 years left in the scheme so the total charge would be equivalent to a pension reduction of £4,560 p/a from age 60.
Important points for you to consider:
- Deferring the tax charge commits you to paying it by this method in future years. NHS Pensions will apply this automatically.
- Reducing your NHS pension in this way could mean you have a lesser liability to the lifetime limit on pension values.
- The deferred payment is subject to interest calculated by NHS Pensions.
- Deferment doesn’t affect your death-in-service benefits.
The only way to categorically avoid the tax charge is to leave the pension scheme. However, this is unlikely to be the best course of action as the benefits accrued often outweigh the penalty charge.
NHS pensions is unable to provide financial advice and there is a strong possibility that these issues are beyond the knowledge of many non-dental accountants and financial advisers. Even those accountants who are ‘dentally aware’ may steer clear – they may not be authorised to provide pension advice.
Financial issues for dentists get more complicated year-onyear and the subject discussed in this article is likely to catch a
greater number of dentists from April 2014, when the annual pension allowance drops from £50k to £40k. Also, with planned
reductions to the lifetime pension allowance it is increasingly important that dentists seek expert advice from a specialist dental accountant who knows which questions to ask and where to get information from.