With the start of the new pension year, now is a fitting time to consider which pension tier rate you should be paying.
Determining this can be complicated; there have been a multitude of changes, and now the McCloud Remedy and resulting return to the Legacy schemes (either 1995 or 2008) will flip everything on its head. Once implemented, many GPs could be due pension refunds going back as far as April 2015.
Taking specialist advice is therefore a worthy exercise; aside from the impact on your pocket, getting pension contributions wrong can have lasting implications for your pension records, tax position and ultimately the pension you receive.
VE Medical provide specialist medical accountancy to Locums, Portfolio & Sessional GPs with a dedicated, personal service and tailored expert advice in accountancy, tax and NHS Pension compliance. If you would like Vicky's help in carrying out a pension compliance or tax health check, contact her on 0161 377 3377, text 07436 899 890 or email firstname.lastname@example.org
How much pension should you be paying?
The level of employee pension contributions you pay is known as the tiered contribution rate. Broadly speaking, this is a sliding scale between 5% and 14.5% based on the level of your practitioner income. This percentage should then be applied to your pensionable pay across all your practitioner (but not officer) posts.
The tier rate is considered on a pension year basis, being 1 April to 31 March.
As a sessional GP specialist accountant, all too often I see new clients coming to me that have, unbeknown to them, significantly overpaid or underpaid pension contributions and/or not completed their annual Type 2 form.
This is not all that surprising given that the method of calculating the tier rate has changed every two years since the 2015 scheme was introduced.
The impact of the McCloud Remedy on pension contributions
The mechanism of implementation of the 2015 Pension Scheme was recently found to be discriminatory. The government therefore published a public consultation, the result of which is known as the McCloud Remedy. This effectively means that the vast majority of GPs will return to the Legacy (1995/2008) scheme with retrospective effect from 1 April 2015, until 1 April 2022, on which date all will enter the 2015 scheme.
This naturally adds further implications to the mix, temporarily reinstating earlier rules.
This will be welcomed by many as, tax implications aside, pension benefits will be maximised while many GPs could be due a refund of pension contributions going back as far as April 2015.
Those most likely to be due a refund are:
- Freelance locums with no other posts;
- GPs who completed their training after April 2015; and
- GPs who have had a break in service.
However, until the McCloud Remedy is implemented or more information is released on this matter, the current rules are technically still applicable.
Which tiered rate should you apply under the current rules?
This is not always as simple as adding up the pay across your posts.
For portfolio GPs, the first step is to consider which posts are practitioner and which are officer. This isn’t always obvious, but for most salaried GPs and locums it should be straight forward.
The next step is to look at your expected total pensionable pay for each post. This can be 90% of your fees, 100% of fees, or your total gross pay depending on the role e.g. locum/out of hours/salaried.
A common pitfall is the use of taxable pay, often taken from a P60. This will almost always be less than pensionable pay and result in a pension underpayment. Primary Care Support England (PCSE) will likely reject a Type 2 form that has been prepared on this basis, leaving gaps in your pension records.
The final step is to consider if you anticipate any breaks of service and therefore whether you need to calculate your annualised pensionable pay.
What is annualised pensionable pay?
Annualisation was introduced to 2015 scheme members to consider the rate of pay, rather than total pay. It was an attempt to make the system fairer, so that those who effectively earned higher amounts per day worked, didn’t fall into a lower tier rate simply by working fewer days.
Those affected by this include:
- Freelance locums with no other roles;
- Trainee GPs in the year you qualify;
- Salaried GPs starting or leaving a post in the year.
Where annualisation applies, you have to gross up your pensionable pay to account for periods considered to be 'breaks in service'. The resulting tier rate is then applied across all actual practitioner pensionable pay received.
To demonstrate, let’s look at a newly qualified GP starting their first practitioner post half way through the year. Assuming a salary of £60,000 per annum, i.e. £30,000 pensionable pay in that pension year, this would fall into the 12.5% tier rate (i.e. based on £60,000), rather than 9.3% (based on actual pay received of £30,000). The rate of 12.5% is then applied to actual pay, resulting in pension contributions of £3,750 in that role.
For most freelance locums with no other roles, the implications are drastic, usually resulting in a tier rate of 14.5% regardless of the total level of income. That said, there are acceptable workarounds to this and VE Medical can offer further guidance.
Once implemented, the impact of the McCloud Remedy effectively removes annualisation for the period April 2015 until April 2022. Guidance is yet to be issued on the retrospective implications of this, however you should look to discuss how this might impact you with a suitably qualified medical accountant.
What if you apply the wrong rate?
Following the end of the pension year, the majority of GPs are required to submit a Type 2 form. This is similar to a tax return but serves to reconcile employee pension contributions to pensionable pay as opposed to tax payments to taxable pay.
This form both updates your pension record and ensures that you have paid the correct contributions. It provides a means of obtaining a refund of overpayments and the opportunity to correct underpayments.
For some, the form can be complex, involving all the steps outlined above albeit with the benefit of hindsight rather than based on a projection. Getting the form wrong may directly affect your pension and tax position and therefore obtaining professional advice from VE Medical could prove valuable.
VE Medical can not only help estimate your tier rate in the current pension year, but can also check that the correct payments have been made for previous years and assist in the completion of the Type 2 form.
- Vicky Earnshaw is both a chartered accountant and chartered tax adviser and works with locum GPs, salaried GPs and portfolio GPs. Vicky has a wealth of knowledge and experience in GPs accounts, tax and NHS pension compliance.