Ongoing tax penalties for high earning medics

The pension and pockets of high earning NHS doctors and dentists are being hit hard with tax penalties that are likely to catch many unaware medics out over the coming years. Why is that and what can you do about it?

Your annual allowance for pension savings

The standard annual pension allowance is £40,000 a year. If you and your employer contribute more than this limit into your pension each year, you may be liable to a tax charge.

However, thanks to the Government’s Tapered Annual Allowance rules that were introduced in April 2016, if you’re an NHS doctor or dentist who is deemed to receive income and pension benefits in excess of £150,000 a year, your annual pension allowance is likely to be lower than this £40,000 limit.

Calculating how much you have contributed to your pension

Because the NHS Pension Scheme is a defined benefit scheme, calculating how much you have contributed to your NHS pension each year (and thereby whether or not you have exceeded your annual allowance):

  • IS NOT based on the amount that you and your employer physically pay into your NHS pension each year;
  • IS based on the deemed growth in your pension benefits (referred to as ‘pension input’) from one year to the next.

Your pension input is a completely different figure to your actual pension contribution. You can find out what your pension input figure is from your Annual Allowance Pension Savings Statement provided by the NHS.

Is your annual pension allowance tapered?

OK so you now know how much you are deemed to have contributed to your pension, but how do you know if your annual pension allowance is the standard £40,000 or tapered and below £40,000?

The calculation used to determine your individual annual allowance is based on your income but, contrary to common belief, income isn’t just ‘income’.

There’s earned income, unearned income, dividend income, rental income, taxable income, and non-taxable income. There’s also ‘threshold income’ and ‘adjusted income’.

Step 1: How to calculate your threshold income

This is not a simple calculation and is one you should take advice on to determine but, in broad terms, your threshold income is:

Your taxable income (including earned and investment income)
+
Any employment income given up for salary sacrifice (post 9 July 2015)

Your own pension contributions (gross and ignoring any employer contributions)

Any taxed lump sum death benefits received
=
Your threshold income

If your threshold income is above £110,000pa, your annual allowance may be tapered and you need to follow Step 2 below.

Step 2: How to calculate your adjusted income

Again, this is not a simple calculation and one you should seek advice on but, as a general guide, your adjusted income is:

Your taxable income (including earned and investment income)
+
Your pension input figure (from your Annual Allowance Statement)
=
Your adjusted income

Once you know what your threshold income and your adjusted income figures are, you can work out what your annual pension allowance is.

Threshold income less than £110,000pa

Your annual allowance will not be tapered, regardless of the level of your adjusted income. You can contribute up to a maximum of £40,000 a year (the standard annual pension allowance limit).

Threshold income more than £110,000pa but adjusted income less than £150,000pa

Your annual allowance will not be tapered and will stay as the annual pension allowance limit of £40,000.

Threshold income more than £110,000pa and adjusted income between £150,000pa and £210,000pa

Your annual allowance will be tapered so that for every £2 of adjusted income you earn over £150,000, you will lose £1 of your annual pension allowance. If you breach your lower, tapered annual allowance, you will have a larger tax bill – simple as that!

Threshold income more than £110,000pa and adjusted income above £210,000pa

Your annual pension allowance will have reduced to £10,000 (tapered reduction is capped at £30,000).

What if your pension contributions have exceeded your annual allowance?

If you have no unused annual pension allowance to bring forward and your deemed pension contributions are more than your annual allowance, you are likely to have to pay an annual allowance tax charge.

If this tax charge is less than £2,000, you will have to pay it yourself in cold, hard cash.

If the charge is £2,000 or more, you can normally elect for NHS Pensions’ Scheme Pays (as long as you apply in time). However, there are anomalies and conditions that may mean only some of what you owe HMRC is paid by the Scheme Pays scheme. NHS Scheme Pays: It may not pay as much as you think >

What should high earning NHS doctors and dentists do?

As a member of the NHS Pension Scheme, you would be forgiven for thinking that there’s a conspiracy out there to ensure you pay more and more tax until “your pips squeak” (as a famous man once said).

Irrelevant of whether that’s true or not, how much you can contribute to your pension tax-free is clearly no longer as simple as it potentially once was!

A starting point for all NHS doctors and dentists is to ask for your Annual Allowance Pension Savings Statement every year and then to discuss your situation with a financial adviser.

If you also have a private income, you may well be forced to look at how you pay yourself too.

In short, don’t wait to sort out your affairs. HMRC are not the forgiving types!

Do you know if your annual allowance has been tapered? Let us know by adding a comment below.

Calculating your annual pension allowance is a very complex area. This article is designed to provide an overview for members of the NHS Pension Scheme to ensure that those potentially affected are aware of the Tapered Annual Allowance rules. It isn’t designed to enable you to self-diagnose. If you think you are a doctor or dentist who is impacted by the Tapered Annual Allowance rules, we strongly recommend you seek professional advice.

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