What are your options?
If you have a tax charge to pay, there are 3 main options:
- You can opt to pay the charge via your tax return through Self-Assessment
- Or you can elect to use the Scheme Pays option
- Your third option is to do a mix of one and two, paying some directly to HMRC and the remainder through your pension
Self-Assessment payment to HMRC
If you pay the annual allowance charge yourself you must pay some or all of your annual allowance charge to HMRC by 31st January, following the end of the relevant tax year e.g. for the 2023 tax year, this will be by 31st January 2024.
If you already complete a self-assessment tax return, there is a section in there to do this
If you pay this late there will be a ‘late payment’ fine of £100 and there may be interest applied.
Scheme Pays Election
In this case you are choosing to have the tax charge paid by your pension. This is ok and you may see this as a ‘cheap’ method as you are not finding the money to do this.
You make this choice (election) by completing a form, the SPE2, you send this to NHS Pensions and they will make a payment to HMRC to cover the tax charge, BUT please be aware that NHS Pensions will note this against your NHS Pension and this is creating an Interest Bearing loan that will need repaying. This is done by a calculation that will reduce the starting amount you are paid when you claim the pension.
How you pay your Annual Allowance charge can have serious implications to your pension and consideration must be given to what is most suitable to you.
If you are close or think you may be close to an AA breach, a Charge, need help in completing an SPE2, or want to discuss this further, please contact us for further information.
The following example shows how the ‘growth’ in each part of the pension is then used to calculate that element of the Annual Allowance.
TPV = Total Pension value. This figure is calculated at the start. Then inflation is added to give a re-valued TPV, which is then compared to the End TPV to calculate the Pension Input Amount
CPI = Consumer Price Index; the measure used to show the rate of inflation
We understand that this is a complex calculation and we have tried to make our example as straight forward as possible.
The important point to note is that IF you have received an Annual Allowance Letter saying you have breached this, contact us, or book yourself onto a Surgery and we will be able to explain your situation in full.