The most important change in the budget for many Legal & Medical clients will be the amendments to the pension annual allowance and the tapering rules.
As you will be aware this has been a major bugbear for many of our higher-earning medics.
Before we get into the 2020 Budget details, let’s recap on the key definitions:
- Threshold income is total income before tax (less employee/personal contributions.)
- Adjusted income is total income before tax plus employer contributions.
- Annual allowance is the maximum amount an individual’s pension can grow by in one year (defined benefit)* or contributions that can be made (defined contribution) before a tax charge is applied.
- The pension input amount** is the increase or growth in the value of a member’s benefits in the pension input period, which runs in line with the tax year
So what’s changed for our doctors and dentists in 2020?
The annual allowance of £40,000 remains except where threshold and adjusted income exceed defined levels. For the new tax year, the threshold income figure has been increased to £200,000 – that’s a £90,000 increase! Only if your threshold income exceeds this level will you have to consider adjusted income.
However, if your adjusted income exceeds £240,000 per annum, then you will be subject to a reduced annual allowance and possible tax charge.
Here comes a negative…
Tapering of the annual allowance goes further than it did before, so instead of a minimum tapered allowance of £10,000, it now drops to just £4,000 for those whose total adjusted Income is £312,000 or more (and reduces below £10,000 once adjusted income exceeds £300,000).
Bear in mind, as before, your NHS pension input amount needs to be added to your threshold income in order to calculate the correct total adjusted income figure – so those who have big increases in income, perhaps due to an award and/or high overall levels of income, will still need to tread carefully and take specialist advice.
Nevertheless, this means a great many of our clients will find the annual allowance position eased, which will be a big relief. We still recommend obtaining annual input statements from the NHS every year and contacting your adviser to fully check your situation.
Changes take effect from 6th April 2020
The commitment by the NHS to pay annual allowance charges (with certain caveats) via reimbursement to scheme pays remains in place for this year just ending (2019/20).
Other changes to be aware of…
The Lifetime Allowance has increased to £1,073,100 in line with inflation. (Lifetime allowance is the total benefits you can build up from all registered pension schemes without incurring a tax charge)***
Selling your dental practice or other limited Company? There are changes to Entrepreneurs’ relief which will affect those of our clients who have limited companies, especially dentists who are hoping to use this relief at retirement by selling their practice. The relief has been substantially limited to businesses with gains up to £1,000,000 (lifetime limit per person). This is something you may need to discuss in detail with your accountant if you think this is likely to affect you.
What’s changed with ISAs
The adult ISA annual subscription limit for 2020/21 will remain unchanged at £20,000. However, the annual subscription limit for Junior ISAs and Child Trust Funds will be increased, quite substantially, from £4,368 to £9,000 meaning that 16/17 year-olds can have £29,000 in total (including £20,000 to a cash ISA) added to these tax-efficient shelters in 2020/21.
With university costs so high and property prices looking like they will continue to rise this is a welcome way to increase our tax-efficient saving for the next generation.
Capital Gains Tax Allowance
The Capital Gains Tax allowance has increased to £12,300 per annum.
There are no changes to income tax or higher rate tax.
The Inheritance Tax allowance remains at £325,000 and the additional main residence allowance will increase to £175,000 from April 6 as expected. This means that a married couple may have a total inheritance tax allowances of £1 million. (It’s worth noting for this to happen they would have to have children who are inheriting the property, and the property value must be equal to 2 x £175,000.)
All in all, it was a Budget with plenty of headlines, some of which will offer a much needed relief to many of our clients. However, as always, your finances are highly individual. If you are unsure how these changes affect you, please get in touch.
N.B. The Financial Conduct Authority does not regulate tax advice
Has the new 2020 budget pension annual allowance and tapering rules worked to your advantage? Let us know by adding a comment below.