Double taxation

Recombinant

Following a promotion, as a member of the NHS 1995 defined benefit scheme, both the lifetime and annual allowances have been exceeded. Does this result in paying two charges i.e. being taxed twice for the same benefit? Does one need to reclaim some of the tax paid?

Malthusian

Yes, you pay the annual allowance charge on your income in that tax year, either out of your income or via Scheme Pays, and you will eventually pay the lifetime allowance charge when you crystallise funds in excess of the lifetime allowance. (I.e. probably when you take your NHS pension.)

Paying the annual allowance charge via Scheme Pays is very likely to be the best option, as you are reducing benefits that are over the lifetime allowance limit anyway.

There is no way of reclaiming it. Just like you can't reclaim income tax when you buy something with VAT on it.

However using Scheme Pays effectively means the money used to pay the annual allowance charge is relieved against the lifetime allowance charge.

If this is the first time you've been over the annual allowance limit, have you carried forward unused allowance from the previous three years?

Recombinant

Thanks for the point about scheme pays reducing the amount over the annual allowance. Hadn't understood that before.
But, for a substantial sum added to the "pot" over the annual allowance it will attract a charge for the amount in excess of the annual allowance and another charge for increasing the pot over the LTA. I was thinking HMRC might give some allowance in this situation because it might reduce the value of the marginal amount to below zero.

Malthusian

Recombinant said:

Thanks for the point about scheme pays reducing the amount over the annual allowance.

The amount over the lifetime allowance (the amount over the annual allowance is what it is), but I think you've got it.

Recombinant said:

I was thinking HMRC might give some allowance in this situation because it might reduce the value of the marginal amount to below zero.

I can't see how it could go below zero. If I'm an additional rate taxpayer and over the annual allowance, my employer pays £10,000 into the scheme (we'll pretend it's DC to keep the maths simple), and I elect for Scheme Pays, that will reduce my £10,000 to £4,500. Then say I draw the £4,500 as a lump sum and pay a 55% LTA charge on it - that reduces the value of the contribution to £2,025. A 79.75% tax charge is pretty rubbish (especially as I'd've "only" paid 47% personal tax and 13.8% employer's NI if they'd just paid the money to me directly) but it's not >100%.

That is almost the maximum tax charge you can pay (you could theoretically draw the excess as taxable income and pay 60% tax on it, but that's getting silly).

If it's an annual pension rather than a DC fund being added to the pension the tax still can't exceed 100%.

Growth in the pension might cause the eventual tax charge to exceed the amount paid in. (For example, if my £4,500 grows - over many years and with some good fortune - to £20,000, I would pay an £11,000 lifetime allowance charge to draw it as a lump sum.) However, that doesn't mean you're being taxed at more than 100%. If the pie grows then HMRC's slice grows, but that doesn't mean they're taking a bigger percentage of the pie. If I buy an investment at £100, sell it at £1,100, and I pay £100 capital gains tax on the sale (having used my allowance elsewhere), that doesn't mean I've paid 100% capital gains tax.
The Government could invent another 50 pension tax charges but at as long as each charge is applied to the remainder left by the previous charge - as is the case here where the LTA is applied to the amount left after deducting the AA charge - it is mathematically impossible for you to be left with less than zero.

Recombinant

If you don't use the scheme pays option then it looks worse? What rate of deduction does that give?

EdSwippet

Malthusian said:
... If I'm an additional rate taxpayer and over the annual allowance, my employer pays £10,000 into the scheme (we'll pretend it's DC to keep the maths simple), and I elect for Scheme Pays, that will reduce my £10,000 to £4,500.

Assuming that you're working on 45% as "additional rate" tax, shouldn't that be "reduce my £10,000 to £5,500"? This alters the outcome, though an effective 75.25% tax rate remains pretty heinous even so.

EdSwippet

Recombinant said:

If you don't use the scheme pays option then it looks worse? What rate of deduction does that give?

On a set of simple figures(*), such as given by Malthusian above, 45% tax payable on a contribution and then 55% on its eventual withdrawal with no use of scheme pays comes to a nice round 100% effective tax rate.

The 55% rate on lump sum withdrawals over the LTA provides an effective cap on the tax on withdrawals. It's theoretically possible to fall into the 60% band, but only by not taking a lump sum (and you certainly would if it saved you 5% in tax). I think it could be possible to face an annual allowance charge of 60% though -- perhaps you earn £150k and contribute £50k into pensions, so the £10k over is added back to salary and then taxed as income. In that case, and combined with LTA penalties, it seems like without scheme pays a tax rate of more than 100% may indeed be possible.


(*) For example, a simple 'defined contribution' pension such as a SIPP. However, the NHS pension scheme is neither a 'defined contribution' pension, nor simple. Your own numbers here may be much harder to uncover.