Scheme Pays Elections in the NHS Pension Scheme: Deadlines, Interest and Key Considerations

For many NHS Pension Scheme members, particularly higher earners or those affected by pay progression, additional sessions, pensionable awards or the tapered annual allowance, an Annual Allowance tax charge can come as an unwelcome surprise. A scheme pays election allows members to ask NHS Pensions to pay some or all of that tax charge to HMRC on their behalf, with the cost later recovered through a reduction to their NHS pension benefits.

What is a scheme pays election?

Scheme pays is a facility that allows an Annual Allowance tax charge arising from growth in NHS pension benefits to be paid by the NHS Pension Scheme rather than directly by the member. It does not remove the tax charge; instead, the scheme pays HMRC and records the amount as a debt to be recovered from the member’s future benefits. Elections are irrevocable. They can be amended, but once an election has been made, it is not possible to remove it entirely from the members record.

NHS Pensions offers both mandatory and voluntary scheme pays. Mandatory scheme pays generally applies where the member’s Annual Allowance charge is more than £2,000 and the pension input amount in the relevant NHS scheme exceeds the standard Annual Allowance. Voluntary scheme pays may be available in other circumstances, including where the charge arises because the member’s available Annual Allowance is reduced by tapering or where combined growth across NHS schemes creates a charge.

Under a mandatory election, the scheme is jointly and severally liable with you for the tax charge and any interest. Under a voluntary election, you remain solely liable for the tax charge and any interest. Elections that are submitted after the deadline cannot be treated as mandatory, meaning individuals may incur late payment interest from HMRC.

Deadlines

The normal statutory deadline for making a scheme pays notice is 31 July in the year following the year in which the relevant tax year ended. For example, an Annual Allowance charge relating to the 2025/26 tax year would normally require a scheme pays election by 31 July 2027.

Members should not wait until the deadline if they already know, or can reasonably estimate, that a charge will arise. Pension Savings Statements, remedial pension savings statements and McCloud-related adjustments can complicate timing, and in some cases amended or estimated elections may be needed. Missing the relevant deadline can restrict whether NHS Pensions can accept the election, particularly where the request falls outside the mandatory scheme pays rules.

Interest charged by NHS Pensions

When NHS Pensions pays an Annual Allowance tax charge under scheme pays, the amount is recorded as a notional negative defined contribution account. Interest is then applied until the member retires. The rate of interest applied from 31 March 2023 is 1.7% in excess of inflation, measured by reference to the Consumer Prices Index. Earlier periods used higher rates, for example 2.4% in excess of inflation from 1 April 2019 to 30 March 2023.

This means the eventual cost is not simply the original tax charge. The longer the period between the election and retirement, the more time there is for interest to accumulate, with interest compounding each year, increasing the likely reduction to future benefits.

How the charge is recovered from benefits

At retirement, the negative account is converted into a permanent reduction to NHS Pension benefits using actuarial factors in force at that time. The precise reduction will depend on the amount paid, the interest applied, the member’s age, the scheme section, the normal pension age and the scheme pays factors applicable at retirement.

For 1995 Section members, both the pension and the automatic retirement lump sum are reduced proportionately. For 2008 Section and 2015 Scheme members, the reduction applies to the annual pension before any commutation of benefits for lump sum entitlement takes place. NHS Pensions guidance indicates that no reduction is applied to spouse or dependant benefits in the event of the member’s death.

Scheme pays or pay personally?

The decision is not simply a cash-flow question. Paying personally avoids a future pension reduction and avoids scheme pays interest, but it requires the member to fund the tax charge from their personal finances by the Self Assessment deadline. Scheme pays can preserve short-term cash flow, but the trade-off is a lower pension in retirement.

Members should consider the size of the tax charge, the expected time to retirement, their likely retirement age, available savings, marginal tax position, investment alternatives, health and life expectancy, and whether the charge has arisen because of one-off circumstances or is likely to recur. Those affected by the tapered Annual Allowance should also consider whether future income planning or altering work patterns could reduce future exposure.

Practical checklist before making an election

• Check whether you have an Annual Allowance charge after allowing for carry forward from the previous three tax years.
• Confirm whether the charge relates to NHS pension growth, as NHS scheme pays cannot be used for charges arising from non-NHS pension savings.
• Identify whether mandatory or voluntary scheme pays applies, as the member’s ongoing liability and late-payment interest position may differ.
• Submit any election before the relevant deadline and retain proof of submission.
• Report the Annual Allowance charge correctly on the Self Assessment tax return, even where scheme pays is used.
• Consider obtaining specialist tax or financial advice before making an irrevocable decision.

George Crow | Senior Manager in our Medical Team | Norwich, Norfolk