You may have heard of the ‘McCloud Remedy’ but might not know exactly what this is. Thankfully, Tom Slevin, Client Services Director, has outlined the main points you need to know about the McCloud Remedy, why this has come about, what this means for your pension and whether there are any tax consequences.
Over to Tom…
It’s probably best if I start with the basics- what is the McCloud Remedy?
In 2015, the government made changes to Public Service Pensions, including the NHS Pension Scheme. This change then created the 2015 NHS Pension Scheme. Younger members of the pension scheme were moved from the 1995/2008 NHS Pension Scheme (now referred to as the legacy schemes) into the newer 2015 NHS Pension Scheme on 1st April 2015, whilst members closer to retirement remained in the 1995/2008 scheme until retirement or moved into the 2015 scheme at a later date.
After various court cases, judgement found in 2018 that when public service pensions changed in 2015, the government had discriminated on the grounds of age by only protecting their older members. The government is therefore removing this age discrimination-they are doing this through the McCloud Remedy.
Those affected by this will be those pension members who moved from the 1995/2008 NHS Pension Scheme on or after 1st April 2015 and were members of the NHS Pension Scheme before 31st March 2012. From 1st October 2023, the NHS Pension Scheme has moved eligible members pensions from the 2015 scheme into the 1995/2008 scheme for the period from 1st April 2015 to 31st March 2022 (the remedy period). From 1st April 2022, all active members of the NHS Pension Scheme are now within the 2015 Pension Scheme.
What does this actually mean for dentists
For eligible members of the NHS Pension Scheme, their accrued benefits in the 2015 NHS pension scheme will be moved into the legacy schemes for the 1st April 2015 to 31st March 2022. The legacy schemes have a lower retirement age and other benefits over the 2015 scheme and for many dentists, this will result in better pension benefits on retirement.
On retirement however, eligible pension members will have the choice of keeping their pension benefits accrued for the period above in the legacy scheme or transferring them back into the 2015 scheme. Each eligible member will receive a statement showing the effect of this change on their pension benefits and they have the option of picking the best benefits for them. This choice is made on retirement and you do not need to make that decision now.
From 1st October 2023, the pension benefits accrued between 1st April 2015 and 31st March 2022 have been rolled back into the legacy schemes. What this means is that the pension benefits stated on your various pension benefits statements are incorrect. The NHS pension scheme now have until 5th October 2024 to carry out this rollback, correct the various pension statements and update members with the new information.
Are there any tax consequences of this?
For many members, the answer will be no.
For those members who have at any point in the remedy period had to pay, or opted for the scheme to pay, a pension annual allowance tax charge, there may be some tax consequences they must consider.
Each year the NHS Pension Scheme calculates the ‘pension input’ for each pension member. Pension input is the difference between the closing value of the pension scheme at the year end and the adjusted opening value of the pension scheme at the start of the year. Your pensionable earnings each year accrue pension benefits and the total of your accrued pensionable earnings/pension benefits are converted into a value for your pension fund for tax purposes.
If the pension input, or difference in closing value and adjusted opening value of their pension benefits, are higher than your pension annual allowance entitlement, then you may have some tax to pay to HMRC. For many high earning NHS dentists, their pension input was higher than their available annual allowance and had annual payments to make to HMRC to pay the pension annual allowance tax charge. These taxpayers had a choice of paying this themselves or requesting the NHS Pension Scheme to pay this on their behalf, with a subsequent reduction in pension benefits on retirement for the scheme paying this tax for them.
With the pension benefits for eligible members being rolled back from the 2015 scheme into the legacy scheme, one consequence of this is that the pension input will need to be recalculated for each member and this could see the pension input being lower and less tax actually being due to HMRC.
New legislation was put in place from 1st October 2023 so affected members could reclaim any tax overpaid in the legacy period. If the scheme paid the tax charge for you, this will be repaid back to the pension scheme.
How do you know if you will be affected by the changes
We have categorised NHS pension scheme members into 3 different categories and the potential tax impact for them.
The first category is those who the McCloud remedy does not affect. This includes members who started pensionable service on or after 1st April 2012 or those older members who never paid into the 2015 pension scheme in the remedy period.
There is no change for these dentists and their annual reporting requirements regarding the pension annual allowance remains the same. They will still receive pension savings statements (PSS1s) by 6th October 2023 if they have exceeded their annual allowance and these members can request the statements from the NHS pension scheme. Annual allowance tax charges if payable are due to be paid by 31st January 2024 and reportable on the self-assessment tax return.
Members who have opted out of the pension scheme between 1st October 2014 and 31st March 2022
The second group is those NHS pension scheme members who opted out of the NHS pension scheme in the period above but continued to carry out NHS work.
They now have the option to opt back into the legacy NHS pension scheme for all or part of the remedy period. This will come at the cost of the NHS pension contributions due on their pensionable pay and they can pay this in a lump sum or agree an instalment plan with NHS pensions. If they have already retired and want to do this, the contributions will be taken from their pension income, which will be uplifted for the extra pensionable earnings accrued in their career.
Independent financial advice should be sought before going down this route to determine if this is the right option for you.
The final group will be a large number of dentists but as stated above, it is those who have paid one or more pension annual allowance tax charges who need to be most aware of the changes. This group consists of members of the NHS pension scheme who started pensionable service on or before 31 March 2012 and were paying into the 2015 pension scheme for all or some of the period.
They will be moving from the 2015 scheme into the 1995/2008 scheme and so their pension input needs recalculating for 2015/16 to 2021/22, which will be restated on the remediable service pension savings statement. This will be available by 6th October 2024 and the NHS pension scheme will then also need to have calculated the 2022/23 and 2023/24 pension input by that date. By 6th October 2024, there could be some dentists where the pension input has reduced for the 7 years between 2015/16 and 2021/22 where they have paid the pension annual allowance tax charge throughout these years and HMRC will need to be notified of the reduction in tax due for each of these years.
In addition, the 2022/23 and 2023/24 pension input figures will then be available and tax may be due for both of these years.
For this category of pension members, HMRC have confirmed that the pension savings tax charge should not be entered on the 2022/23 tax return, but should be entered on the new reporting service opened on 5th October 2023.
This reporting service will be used by affected taxpayers to update HMRC with their recalculated pension input and pension annual allowance tax charges from 2015/16 to 2022/23 and reclaim any overpaid tax.
We will provide more details on the reporting service in a follow up article shortly.
Here to help
If you have any questions on the McCloud Remedy and its consequences or the NHS Pension scheme, our dedicated specialist team are here to help. To speak to our team on how we can assist, give us a call on 0151 348 8400.