Warning letters from NHS Pensions have landed with some dentists during the last few weeks. The HMRC gave the pensions agency until October 5 to issue letters to dentists who may have breached their annual pension allowance. These are entitled Annual Allowance Pension Savings Statement (2011/2012).
Many dentists will find out for the first time that they have breached the new limits on annual pension funding which were effective from April 6, 2011. For some it will be too late to take action to mitigate this and sizeable charges could be levied. Astute members of the NHS pension scheme will have noticed that the figures included in this letter run only as far as the year ending March 31, 2012. This means that for the previous and current year, further breaches of the allowance may have been incurred already.
Penalties
Dentists breaching the annual allowance will suffer a penalty charge equivalent to their highest rate of income tax. For example, a dentist with taxable income of £120k with contributions £5,000 in excess of the annual pension allowance will suffer a charge of £2,000 (based on 40 per cent x £5,000).
There are two payment options available. First, the charge can be paid to the HMRC through self assessment (your tax return) as an increase in your tax bill. Second, the charge can be taken from your NHS Pension benefits at retirement – including an interest charge for deferment.
My opinion is that the latter option is probably more favourable for most dentists. This is partly because deferring the penalty charge allows it to be paid in the form of deducted retirement income, softening the blow. Also, in the event of death before retirement, any penalty charge is waived from the pension entitlement transferred to the survivor. Third, this approach could limit your exposure to the lifetime allowance (the maximum amount of tax relieved pension that you can build up over your
life – also known as LTA) in the future.
If you didn’t receive a warning letter, this does not necessarily mean you won’t have a penalty charge to pay. You may be under the annual allowance limit as far as the NHS is concerned but over the limit when the HMRC adds in personal pension contributions. So you may be on course to exceed the annual allowance this tax year and should investigate your current position as soon as possible to take action if necessary. If you didn’t receive a letter and want to find out the deemed value of your NHS pension contributions you can request this information from the NHS Pensions or through your adviser.
For many dentists the only option would be to stop active contributions to the NHS pension scheme. For most, this is not advisable as the positive benefits of the scheme often outweigh the negative impact of the penalty charge. In summary, I advise you to take advice from an independent financial adviser who has specialist knowledge of the NHS pension scheme.