Pension contributions over cap - big tax liability coming?

ChumpusRex

Curious one this. I work in the NHS, and have a works pension, which is final salary.

Rather unexpectedly, I got a letter from NHS pensions telling me that I had made £58k of contributions last tax year, and that I need to report this to HMRC as there may be a tax liability.

I'm not quite sure what has happened, as my records show I paid £10k of contributions (and there would be a matched £10k employers contributions). I have not had a pay rise, in fact, after changes to hours, I've had a pay cut.

I've never had a letter like this before, even in the one year when I got a very large pay rise due to a big promotion.

The only thing I can think of is that the change in the pension scheme has triggered some sort of recalculation of the already accrued benefits, and that this recalculation has resulted in a liability based upon the hypothetical pension pot size.

I did recently opt to transfer my pension from the old pension scheme into the new pension scheme, so I'm guessing that this is what has triggered the liability. NHS pensions did provide extensive advice about the option of transfer, but at no point did they warn about the possibility of a tax liability resulting from it.

Sorry, for the long rambling post - just a bit confused about what happens now.

1. Is there likely to be a tax liability to pay? Can this be carried over?
2. Where has this "phantom contribution" come from? Am I right in thinking about the transfer of benefits has created them?
3. Would it be worth a complaint to NHS pensions over their failure to warn of this risk? (Not really looking for financial compensation, as I don't think it would have changed my find, but feel a bit annoyed as the possibility of a sudden tax liability was not mentioned).

kidmugsy

First possibility: because £58k > £40k, you've used more than your annual allowance, but you are allowed to transfer forward unused allowance from up to the three previous years.

Second possibility: £58k > your annual earnings. I don't know of a solution to that.

hugheskevi

I got a letter from NHS pensions telling me that I had made £58k of contributions last tax year, and that I need to report this to HMRC as there may be a tax liability.

This probably said you had a pension input of £58,000 not that you made £58,000 of contributions. The pension input figure measures the change in value of a Defined Benefit pension over a year, using HMRC methodology.

It also probably said that you need to calculate whether you have a charge to pay, and if so that you must report this to HMRC. You do not have to report the pension input figure to HMRC, you only report if you have a charge after considering carry-forward.

I'm not quite sure what has happened, as my records show I paid £10k of contributions (and there would be a matched £10k employers contributions).

Where are you getting £10,000 matched employers contribution from? That suggests a Defined Contribution scheme, whereas you say you were in a final salary scheme.

in fact, after changes to hours, I've had a pay cut.

Your pension will be based on Full-Time equivalent, so changes in hours do not matter except for rate of future accrual.

I did recently opt to transfer my pension from the old pension scheme into the new pension scheme, so I'm guessing that this is what has triggered the liability.

The information on the NHS FAQs suggests not:

If I decide to move my benefits under the Choice 2 exercise, could this cause me to breach HMRC’s Annual Allowance and result in an additional tax charge?
No. The one off decision to move your benefits under Choice 2 would not in itself result in you breaching the Annual Allowance (AA). However you could still attract an AA charge if you have a significant pay rise in any year. Click here for more information about the Annual Allowance.

1. Is there likely to be a tax liability to pay? Can this be carried over?

If you have £18,000 of carry-forward available from the previous 3 tax years there will be no tax liability (assuming you are not contributing to any other pensions). The information sent to you by the NHS should detail information about carry-forward available.

2. Where has this "phantom contribution" come from? Am I right in thinking about the transfer of benefits has created them?

Not enough information to tell. My guess would be lagged effects from the large payrise you mention. Remember that it takes 12 months for the pay increase to be fully reflected in your final pensionable pay. So if the pay increase was in April 2013 it would only be fully reflected in final pensionable salary in April 2014.

3. Would it be worth a complaint to NHS pensions over their failure to warn of this risk? (Not really looking for financial compensation, as I don't think it would have changed my find, but feel a bit annoyed as the possibility of a sudden tax liability was not mentioned).

It doesn't look like the switch was the cause of the breach based on the NHS FAQ.

hyubh

ChumpusRex wrote: »

Rather unexpectedly, I got a letter from NHS pensions telling me that I had made £58k of contributions last tax year, and that I need to report this to HMRC as there may be a tax liability.

Did they really say 'contributions'? The £58K sounds more like the increase in value of your pension for Annual Allowance purposes - the limit is currently £40K, which in practice would mean a 2008 section NHS pension increasing by more than £2.5K over the scheme year (1 April to 31 March).

Presumably the pension administrators run some automated (or semi-automated) Annual Allowance checks some time after year end, and you've come up from this. In practice the administrators can only work with the data employers provide them though, so first thing I'd check is whether there is something awry with either of your last two annual benefit statements. I say 'either' because it might be that your last-but-one statement understated your real benefits (rate of pay much too low, or hours worked mis-stated), which would be significant given the Annual Allowance for a DB scheme is all about the increase in pension earned over the year.

my records show I paid £10k of contributions (and there would be a matched £10k employers contributions).

Your employer wouldn't have merely 'matched'! Nevertheless, contributions are irrelevant for a DB scheme.

I have not had a pay rise, in fact, after changes to hours, I've had a pay cut.

That doesn't reduce your pension however. For your final salary benefits it's the rate of pay that is important.

I did recently opt to transfer my pension from the old pension scheme into the new pension scheme, so I'm guessing that this is what has triggered the liability.

The Annual Allowance pertains to the person, not an individual pension. If by 'old pension scheme' you mean another section of the NHS scheme, I would think it highly unlikely to have given you such a boost. Although, if it did, you'll be quids in even with the tax charge...

1. Is there likely to be a tax liability to pay?

You haven't given enough facts to say.

Can this be carried over?

You can carry forward unused allowances from the past three years. (NHS Pensions can't know for sure whether you have any unused allowances because they don't know about any other pensions you have.)

2. Where has this "phantom contribution" come from?

See above - contributions are irrelevant.

Am I right in thinking about the transfer of benefits has created them?

I would be sceptical, though I suppose not impossible if you exchanged a lower pension but standard lump sum for a higher pension and no standard lump sum (would depend on the conversion rate).

3. Would it be worth a complaint to NHS pensions over their failure to warn of this risk?

Not given what you have reported so far.

ChumpusRex

hugheskevi wrote: »

This probably said you had a pension input of £58,000 not that you made £58,000 of contributions. The pension input figure measures the change in value of a Defined Benefit pension over a year, using HMRC methodology.

Yes. It said exactly that. My fault for not fully appreciating all the different terminology.

It also probably said that you need to calculate whether you have a charge to pay, and if so that you must report this to HMRC. You do not have to report the pension input figure to HMRC, you only report if you have a charge after considering carry-forward.

It didn't say anythign particularly useful like that. It just said they can't advise if there is a charge to pay.

Where are you getting £10,000 matched employers contribution from? That suggests a Defined Contribution scheme, whereas you say you were in a final salary scheme.

My NHS pension statement obtained via the "total rewards statement" system. It states how much my contributions I paid and how much the employer's contributions were. It doesn't say anything about "pension input figure" though, so it appears that different divisions within NHS pensions are sending out statements with different figures on them.

If you have £18,000 of carry-forward available from the previous 3 tax years there will be no tax liability (assuming you are not contributing to any other pensions). The information sent to you by the NHS should detail information about carry-forward available.

I have no idea how to find this information. The letter I have received says nothing about how to check previous years pension input. Presumably, I'll have to write to them and ask for them to send it.

Not enough information to tell. My guess would be lagged effects from the large payrise you mention. Remember that it takes 12 months for the pay increase to be fully reflected in your final pensionable pay. So if the pay increase was in April 2013 it would only be fully reflected in final pensionable salary in April 2014.

The pay rise was in 2011, so it should have gone through in the 2011-12 tax year. I'll have to think about what it might be. It might have been some back pay (but the back pay was because of contracted additional non-pensionable hours, so I wouldn't expect it to be that).

Anyway, thanks for the help - it is much appreciated. Guess, I'll have to be asking NHS pensions what is going on, because I certainly can't work it out from what they have sent me.

xylophone

http://www.nhsbsa.nhs.uk/Documents/Pensions/Annual_Allowance_Example_calculations_Factsheet_v3.0_10.13.pdf

Does this help?

ChumpusRex

OK. Thanks to everyone for their help.

I've checked all the records I have and done all the calculations independently. I am absolutely certain that the source of apparent contributions is the benefit transfer under choice 2.

Under the 2008 scheme, the benefits have a higher notional value than under 1995, and this discrepancy precisely accounts for the apparent "pension input amount".

hugheskevi

My NHS pension statement obtained via the "total rewards statement" system. It states how much my contributions I paid and how much the employer's contributions were. It doesn't say anything about "pension input figure" though, so it appears that different divisions within NHS pensions are sending out statements with different figures on them.

Ignore the nonsense put on total rewards statements - it is usually employer contribution to the scheme, which bears little resemblance to the pension benefit to yourself personally.

The pension input as calculated using HMRC methodology is also fiction and bears little resemblance to the actual change in value of your pension.

I have no idea how to find this information. The letter I have received says nothing about how to check previous years pension input. Presumably, I'll have to write to them and ask for them to send it.

It sounds like the letter you received was a standard Annual Allowance breach letter. In that case, the letter should contain pension input figures for the last three tax years, as it is a HMRC requirement. It is then your job to calculate whether you have enough carry forward, using tools such as the HMRC Annual Allowance calculator.

I've checked all the records I have and done all the calculations independently. I am absolutely certain that the source of apparent contributions is the benefit transfer under choice 2.

That makes things harder, as it is a scheme specific issue.

Transfers do not lead to a pension input unless the value of the benefits is enhanced as part of the transfer - the most common example of this is around "Club Transfers" around the public sector, where employees can move between the big pension schemes and benefit from final salary linking. However, that may be the case here as well.

Fortunately, I suspect you will find you have plenty of carry forward available given when your last big pay rise was.

ChumpusRex

hugheskevi wrote: »

It sounds like the letter you received was a standard Annual Allowance breach letter. In that case, the letter should contain pension input figures for the last three tax years, as it is a HMRC requirement.

That's what it seems to be, but it makes no reference to carry forward, nor does it list any previous years. As a result, it is not very helpful.

Transfers do not lead to a pension input unless the value of the benefits is enhanced as part of the transfer - the most common example of this is around "Club Transfers" around the public sector, where employees can move between the big pension schemes and benefit from final salary linking. However, that may be the case here as well.

The issue is the way in which the benefits are valued. Choice 2 allowed you to migrate your accrued benefits from the 1995 NHS scheme to the 2008 scheme.

The 1995 scheme paid out from age 60 with a big lump sum, whereas the 2008 scheme pays out from 65 with a small lump sum, but annual payments uplifted by 33%. However, the HMRC "pension input" methodology values the 2008 scheme pot 12% higher than the same contributions in the 1995 scheme.

Hence, in the 2014/15 tax year, I transferred from 1995 and 2008 and have been hit with the allowance breach as the pot was revalued to the higher level.

Fortunately, I suspect you will find you have plenty of carry forward available given when your last big pay rise was.

I've done the calculations from my records, and it looks like you are right. Still, I shouldn't have to do the calculations myself. You would have thought that this would have been sent out as standard.

ChumpusRex

I thought I'd update this as things have taken an interesting turn.

My tax adviser ended up asking NHS pensions for a carry forward statement, but this ended up being blank, and the letter they got was exactly the same as mine.

Then, today, I got a thick letter, with 5 years of valuations and pension input statements, with an apology that they had completely miscalculated my inputs and valuations.

So, the 2014/15 input was well within the allowance, and I should never have received the allowance warning letter. However, the big pay rise I had received a few years ago, had gone way, way over the allowance; and I should have received an allowance warning letter at that time.

kidmugsy

ChumpusRex wrote: »

the big pay rise I had received a few years ago, had gone way, way over the allowance; and I should have received an allowance warning letter at that time.

That was calculated, was it, using the size of the allowance at the time? It's only recently fallen to £40k. For 2011-12 the c/fwd allowance would be huge.

http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/annual-allowance/