The Annual Allowance and the Lifetime Pension Allowance: An Expert Break Down for NHS Workers

The Annual Allowance and the Lifetime Pension Allowance: An Expert Break Down for NHS Workers

Recently there have been concerns raised regarding the ongoing issues with the
NHS pension scheme and how additional private income may trigger an additional
tax charge. I have highlighted and broken down two of the main areas that are
causing confusion – lifetime allowance and annual allowance – and applied them to

medic-based scenarios:

Lifetime Allowance:

This limit only applies when you start taking the benefit from your pension (referred
to as “crystallisation”), at which time a valuation of the scheme you are accessing will
be measured against the lifetime allowance. The current limit is £1.03 million and this
is index linked, so it increases each year in line with inflation; so from April 2019 it

will grow to £1.055 million.

For private pensions, lifetime allowance is simply the value of the fund at the time you take benefits, although you are allowed to part-crystallise your fund. This applies if you just take the tax-free cash as well. An example of this:

Private pension value – £450,000
You take the tax free cash of £112,500
You will have used 43.68% of your lifetime allowance.
If after this you then receive any further income this significantly reduces your ability

to pay into pensions in the future.

For the NHS scheme, there is no monetary value to your benefit, just
the liability for the scheme to pay you a pension for life. You can
calculate the crystallisation benefit as follows: you multiply the pension by a factor
of 20 and also add the tax free cash lump sum. For example:
Pension – £25,000 plus tax free lump sum of £75,000
£25,000 x 20 + £75,000 = £575,000

55.8% of lifetime allowance used (current lifetime allowance limit of £1.03 million)

If you exceed the allowance this will trigger a tax charge, and this depends on
whether the excess is taken as a lump sum or as an income. It is sensible to be
aware of this issue however, as no tax charge is triggered until you start taking the
benefit. There is pressure on the treasury to change this, as the current regime is
forcing medical professionals to retire early, leaving a skills gap within the NHS, so

this may change.

Annual Allowance:
This is a much more immediate threat, as the measure is taken annually and

you are responsible to report any issues direct to HMRC.

The annual allowance is currently £40,000 unless you earn over
£150,000, which will result in this allowance reducing on a sliding scale. For example, if you
earn over £210,000 then your annual allowance is £10,000.
This is where the additional income from private practise can have an adverse effect as it may
push your income over this threshold and reduce your annual allowance.
If you have a private pension, this is simply the total amount before any tax relief is


For the NHS scheme, this figure can be obtained from the “Your
Reward” statement. This will tell you how much you have paid, but also how much
your employer has paid, and you need to use the combined figure.

Here is an example of this is:

NHS earnings – £125,000
Private practice – £85,000
NHS pension contributions £35,000
Annual allowance – £10,000

Tax charge – £20,000 at 45% – £9,000

If you do trigger this charge, you have 2 choices:
1. Pay the tax yourself
2. Elect for “scheme pays” – this will have the NHS

scheme settle the tax bill, but it does mean that they will reduce your pension when you come to retire.

Although this is a frustrating position and you may question why bother to do extra work just to get caught out by tax charges. The alternative view is you are still earning more money; 55% of something is better than 100% of nothing.You can also look at other avenues on how the income is taken, such as funding your spouse’s pension or VCTs/EISs to reclaim some tax back.

I hope that this will help to shed some light on this current issue. If you have any
questions do not hesitate to get in touch; I can be found through the expert partner

tab on your Step Into Practice dashboard, in the Management and Financial Planning section.

Andrew Johnston DipFA CeMap

Associate Partner
St. James’s Place Wealth Management

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