The NHS Pension – does your accountant know enough?
I have recently received queries from non-dental accountants grappling with the NHS Pensions Scheme ‘annual allowance’ issues. Dentists exceeding the annual allowance limits have until 31 January 2014 to decide whether to pay an HMRC penalty charge through the self assessment system or to defer this until retirement.
Failure to notify the HMRC may be seen as late payment of tax with the associated interest penalties and fine. To offer advice quickly and effectively requires appropriate specialist dental accountancy knowledge. Below, I explain why.
NHS Pensions (which administers the NHS Pensions Scheme) is required by law to work out how much of the annual pension allowance (APA) you have used. This is known as the ‘input’ amount. A significant part of this calculation is the ‘dynamisation’ factor on accrued pension benefits. This factor is different each year and therefore cannot be predicted. The pension input figures can therefore vary from year to year by a large margin, regardless of the NHS contract performed.
Unfortunately, the NHS Pensions input figures for the 2012/13 tax year are not yet available for all dental practitioners and may not be available in time for the January 2014 tax return. This may not be the case in future years as NHS Pensions has tighter timescales for producing the figures.
An input above the HMRC’s (current) £50,000 APA incurs a penalty payable to the HMRC. There are two ways of dealing with this; it can be paid for through self-assessment or by deduction through your NHS Pension Scheme benefits at retirement. Current information points to paying the charge through the NHS Pension Scheme benefits as being favourable. The drawback of deferring payment is that the eventual reduction of the NHS Pension Scheme, to pay the charge, will attract interest as calculated by the HMRC.
As yet we don’t know what this will be. You will also need to consider personal pension contributions in any calculations. To make an informed decision, dentists should be in possession of the correct facts and figures and have access to specialist advice. Beware that from 5 April 2014 the annual pension allowance falls to £40,000.
In my experience, leaving the NHS Pension Scheme early to avoid the penalty is not necessarily advisable. However, individual circumstances will dictate which course of action is best. It is also important to also assess the scale of a potential Lifetime Allowance charge when making this decision. Dentists should be aware of the specific nature of the NHS Pension Scheme when assessing their proximity to the Lifetime Allowance and should seek specialist advice.
Jeff Williamson is the lead partner at specialist dental accountants PFM Townends. As well as dental accountancy services PFM Townends offers access to in-house specialist financial advisers, well equipped to deal with NHS Pension issues. Visit www.pfmdental.co.uk or contact Jeff Williamson on [email protected] to find out more about the range of accountancy and financial services available for dentists.