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Excess pension contributions

Q:I am a high-earning 54-year-old GP partner in an NHS PMS practice. I understand that to decide whether extra tax is payable there are three steps: 1, calculate the annual pension entitlement at the start of the year; 2, revalue the annual pension entitlement at the start of the year adding in the consumer prices index (CPI) increase; and 3, calculate the annual pension entitlement at the end of the year. The trouble is that there are different interpretations of how these figures are obtained. For example, the BMA suggests considerable extra taxation will occur for most high-earning GPs, whereas the NHS Pensions and HMRC websites suggest otherwise. Various financial advisers also come up with different conclusions. It seems to me that an annual rise in pension of more than £2,600 would trigger extra taxation. Does this take into consideration, however, the CPI increase? Please can you help us with some definitive advice?

A: The annual allowance (AA) places a limit on the amount of tax relievable pension contributions that an individual can make each tax year. As you point out, the AA has reduced to £50,000, effective as of 6 April 2011.

The 'deemed' AA value for defined benefit pension schemes, including the NHS Pension Scheme (NHSPS), is based on the increase in the individual's pension benefits over the tax year, multiplied by a factor of 16 plus the increase in any lump sum if paid in addition to the pension.

The increase is determined by taking the 'closing' pension value at the end of the scheme pension input period (PIP), which is 31 March for the NHSPS, and then deducting this figure from the 'opening' pension value at the start of the scheme PIP, which is 1 April for the NHSPS. The 'opening' value is, however, revalued in line with inflation using the CPI for the September before the start of the tax year.

The 'opening' and 'closing' values are known as the pension input amounts and the difference between the two pension figures is multiplied by the factor of 16. Where a scheme pays a separate lump sum, such as the NHS Pensions 1995 Section, the amount of the additional revalued lump sum is also added to the deemed pension contribution.

Contributions that exceed the £50,000 limit will be subject to an AA charge at the individual's marginal rate of tax. Members of the NHSPS 1995 Section could therefore potentially incur an AA tax charge if their revalued NHSPS pension increases by more than approximately £2,650 over a PIP, for example, £2,650 x 16 = £42,400 plus £7,950 lump sum increase = £50,350.

Individuals who exceed the AA in a tax year will be able to carry forward any unused AA from the previous three tax years to offset, or possibly eliminate, the AA tax charge.

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