With the start of the new pension year (and for many, fresh scars of the Type 2 pension forms recently left behind), now is a fitting time to consider the correct level of employees’ pension you should be paying on your GP income this coming year.
Determining the correct pension payments can be complicated. If the multitude of recent changes have left you thoroughly baffled, I don’t blame you. Furthermore, the result of the McCloud Remedy and the return for all to the Legacy (1995/2008) scheme flips everything on its head and means that many GPs will have overpaid their pension contributions since April 2015.
Aside from the impact on your pocket, getting your pension contributions wrong can have lasting implications for your pension records, your tax position and ultimately the pension you receive. Taking advice from a suitable qualified medical specialist accountant is therefore a worthy exercise and maintaining a regular dialogue with them about changes in your circumstances should keep you on top of your pension game.
How much pension should you be paying?
The level of employee pension payments you should apply is known as the tiered contribution rate. Broadly speaking, it 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 tiered rate is considered on a pension year basis which runs 1st April to 31st 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 Pension form.
This is not all that surprising given that the method of calculating your tiered rate has changed every two years since the introduction of the 2015 Pension Scheme. Some changes have being retrospective while others not. Computing the correct amount of pension to pay has therefore become a potential minefield.
The impact of the McCloud Remedy on your pension payments
To add another implication to the mix, the McCloud Remedy and the resulting return to the Legacy (1995/2008) scheme, flips all previous changes on their head.
The changes will be welcomed by many as, tax implications aside, it will result in many GPs having overpaid their pension contributions since April 2015.
Those most likely to have suffered an overpayment and consequently be due a refund are:
- Freelance Locums with no other posts;
- GPs who completed their training after April 2015; and
- GPs in the 2015 scheme who have had a break of service since April 2015.
The government have yet to release information on the means and timescales of obtaining a refund.
I, like many of you, will be watching this space and can only hope that the information is released soon; not least because it may directly impact the tier rate you apply from this point on.
Which tiered rate should you apply under the current rules?
Working out the correct tiered contribution rate is not simply a matter of adding up the pay across your different posts.
For Portfolio GPs, the first step is to consider which posts are practitioner posts 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. For Locums this is 90% of your anticipated locum fees. For SOLO posts it is usually your anticipated gross fees typically with no deductions. For salaried roles, broadly speaking, this is your total gross pay but there can be other adjustments to factor in and a medical accountant will be able to assist with this.
A common pitfall is the use of taxable pay (often taken from a P60) rather than pensionable pay for this purpose. Since taxable pay will almost always be less than pensionable pay, doing this will result in an underpayment of pension contributions. If taxable pay is entered on a Type 2 Form (see below), PCSE will likely reject the form, leaving gaps in your pension records.
The final step is to consider if you anticipate any breaks of service. Where a break of service applies, there is an additional layer to the calculation. Instead of looking at your pensionable pay, you must calculate your annualised pensionable pay.
What is Annualised Pensionable Pay?
In basic terms, annualisation was introduced to consider the rate of pay, rather than just the total pay. It was an attempt to make the system fairer, such 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 are commonly:
- Freelance Locums with no other roles - any day that isn’t working is now considered a break of service;
- Trainee GPs – the year you complete training and commence your first Practitioner post.
- Salaried GPs starting or leaving a post in the year.
In practical terms, to work out your applicable tier rate you have to gross up your pensionable pay for periods of time during which you are not undertaking pensionable practitioner work. The resulting tier rate is then applied to your actual pay received.
To demonstrate, let’s look at a newly qualified GP starting their first practitioner post half way through the year, or equally a salaried GP who has no practitioner pensionable income for half a year. Let’s assume a salary of £60,000 per annum, i.e. £30,000 pensionable pay in that pension year. This would be assessed for pension contributions on the tiered rate applicable for £60,000, being 12.5%, rather than the actual pay received of £30,000 (i.e. 9.3%). The rate of 12.5% is then applied to the actual pay, resulting in total pension contributions payable of £3,750.
As you can imagine, applying the wrong tiered rate can result in a significant over or under deduction of pension contributions, directly affecting your net pay. NHS BSA have published a useful tool on their website which can also help you calculate this.
What if you get the rate wrong?
By the February following the end of the pension year, the vast majority of GPs (the main exception being Freelance locums who have no other roles) are required to submit what is known as a Type 2 form. This is similar to a tax return but serves to reconcile your employee pension payments to your pensionable pay as opposed to tax payments to taxable pay.
While in some respect this is another admin burden, it also serves as a means of ensuring your pension record is up to date and that you have paid the correct pension contributions. It provides the means of obtaining a refund if you have underpaid and the opportunity to correct your position if you have underpaid.
For many, the Type 2 pension forms can be fairly complex and involve all the steps outlined above, albeit with the benefit of hindsight rather than based on a projection. Getting this wrong may directly affect both your pension and tax position and therefore obtaining professional advice could prove valuable.
A suitable accountant should be able to not only help ascertain the correct amount of pension payments you should be making in the current pension year, but also check that the correct payments have been made for previous years and assist in the completion of the Type 2 form.
It is important that you meet or speak with your accountant periodically to advise them of any changes in your circumstances that may impact on your tiered rate and avoid any nasty surprises when you look back after the year end and complete the Type 2 form if required.
Vicky Earnshaw, founder of VE Medical, works exclusively with GP Locums, Salaried GPs and Portfolio GPs and has a wealth of knowledge and experience in respect of accounts, tax and NHS pension compliance. If you would like her help in carrying out a pension payments or tax health check for you, contact her on 0161 XXX XXXX or email vicky@ve-medical.com