Tapered annual allowance and scheme pays for an NHS consultant
Dr Shah is 56 and a consultant in the NHS Pension Scheme. Her NHS pension input for 2025/26 is £62,000. Her salary is £140,000, and she has private practice income of £95,000. Her threshold income is £210,000 and her adjusted income is £310,000. She has no carry-forward available from the previous three years because she used it after a large bonus. She wants to pay £40,000 into a personal SIPP and claim higher-rate relief. Her accountant has warned her about an annual allowance charge. She has not flexibly accessed any pension. She asks whether she can use scheme pays and whether the SIPP contribution is worthwhile. She pays tax at 45% on part of her income and has £30,000 in a stocks and shares ISA.
1. Calculate Dr Shah's tapered annual allowance and the annual allowance charge arising from her NHS pension input, stating your assumptions.
Read the worked answer
Use the tapered annual allowance rules for 2025/26.
- Threshold income £210,000 exceeds £200,000, so the taper is engaged.
- Adjusted income £310,000 exceeds £260,000 by £50,000. The reduction is £1 for every £2, so £25,000.
- Tapered annual allowance = £60,000 minus £25,000 = £35,000.
- NHS pension input = £62,000. Excess = £62,000 minus £35,000 = £27,000.
- With no carry forward, the annual allowance charge is £27,000 taxed at her marginal rate. If that falls in the additional rate, the charge is about £12,150 at 45%.
Assumptions: the figures are the pension input amount and adjusted income for the same tax year; no MPAA; no carry forward. The charge is reported on self-assessment. The SIPP contribution is a further pension input: £40,000 gross would make total input £102,000 and excess £67,000, increasing the charge. Paying £32,000 net to the SIPP does not avoid this because the gross contribution is £40,000.
2. Explain scheme pays and whether it is available.
Read the worked answer
Scheme pays lets the pension scheme pay an annual allowance charge from her pension benefits instead of her paying cash.
- Mandatory scheme pays: the scheme must pay if the charge exceeds £2,000 and the pension input in that scheme exceeds the annual allowance. On these figures the NHS input of £62,000 exceeds the £35,000 allowance and the charge is over £2,000, so mandatory scheme pays is likely available for the NHS portion.
- The election must be made by the statutory deadline, generally 31 July following the end of the tax year for mandatory scheme pays.
- Scheme pays reduces her pension benefits; it is not free. She should get a benefit statement.
- Scheme pays cannot cover the charge on the SIPP contribution. That part must be paid through self-assessment or by reducing the SIPP contribution.
- Voluntary scheme pays may be available on different terms, but check the scheme's rules.
She should not assume scheme pays solves the SIPP problem.
3. Advise whether she should make the SIPP contribution and what alternatives she should consider.
Read the worked answer
On the facts, the £40,000 SIPP contribution is not tax-efficient. She has no carry forward, her NHS input already exceeds her tapered allowance, and the SIPP would add £40,000 to the excess. The extra relief at 45% does not compensate for a 45% charge plus the loss of liquidity.
Alternatives:
- Use the ISA allowance and keep flexibility.
- Ask whether her employer can facilitate a salary sacrifice arrangement, although this is not usually available in the NHS for additional pension.
- Check whether she can use carry forward in a later year when her private income falls.
- Consider buying additional NHS pension only after checking the annual allowance effect.
- Review the private practice income and pension input timing.
If she still wants to contribute, she should first obtain a full annual allowance calculation and consider scheme pays for the NHS charge. The advice should be documented, because the client may be insistent.