We regularly remind doctors and dentists how important it is to keep an eye on their annual pension allowance, yet still many are oblivious to how breaching your annual pension allowance can massively increase your personal tax bill!
It’s time to request your NHS pension statement
From October 6th each year onwards you can request your most recent NHS pension statement, showing your pension growth in the previous tax year. Obtaining this statement will help you with your tax planning. As any GP partners and dentists are aware, annoyingly their figures are typically a year behind the most recent tax year.
A quick recap on annual allowance
The government sets your annual pension allowance limit. Your annual allowance is the amount of pension savings an individual can make in one tax year before receiving a tax bill. The standard annual allowance limit is £40,000 and it is the GROWTH in your NHS pension benefits that are assessed against this figure – NOT your total contributions.
If you are deemed to be a ‘high earner’ (those with an income in excess of £200,000) then your allowance may be tapered down. It’s a sliding scale, but worst case you could end up with an allowance of just £4,000, reduced down from £10,000 in April of this year.
Remember: The NHS only has to inform you if you have breached the £40,000 allowance. They are not always aware if you have suffered tapering and consequently have a lower allowance. So, it’s in your best interest to acquire your annual allowance figures.
How do I get my NHS Pension Statement?
You can request your NHS pension statement to be sent out by post, which can take up to 12 weeks. It is not the fastest process in the world but it’s always good to have a paper copy. Historically you could obtain these figures over the phone, but due to call volumes this service has been removed.
Upon receipt of your NHS pension statement, it is important to carry out a sense check to see if you can spot any obvious errors. We recommend you pass them to your adviser and accountant as soon as you can to give them as much time as possible to look at the situation.
Having the NHS pension growth figure is only one step in the process.
The NHS figures will not take into account personal pension contributions made or other scheme benefits accrued elsewhere – for example, a military pension relating to membership of the army reserve.
For personal pensions, unlike the NHS scheme, you simply use the gross contributions actually paid rather than any more esoteric calculation based on growth.
Once you have all the figures you can use them along with the previous three year’s figures to see if you have a liability for additional tax.
Warning: Good news to follow
Tapering annual allowance
Changes to tapering annual allowance came into force last April. The change saw the income threshold increased to £200,000. This means anyone who earns under this will not be affected by the tapered annual allowance.
The annual allowance will only begin to taper for those who have an income above this.
Before this change, the minimum annual allowance you could have was £10,000, but this reduced to £4,000.
Are you subject to tapering your Annual Allowance? Let’s check:
The key is knowing your ‘Threshold’ and ‘Adjusted’ incomes. As of April 6th, 2020, you have a tapered annual allowance if:
- your threshold income is over £200,000 (previously £110,000)
- your adjusted income is over £240,000 (previously £150,000)
You won’t be subject to the tapered annual allowance if your threshold income is £200,000 or less, irrespective of what your adjusted income is, so check that first!
What is the difference between the 2 incomes?
In a nutshell ‘threshold income’ is all of your earnings (not just your salary) including chargeable gains on investment bonds (to be clear that’s the whole gain, not just the ‘top slice’ – speak to your adviser if you need to understand the difference). However, all UK pension contributions are not included.
‘Adjusted income’ is all of your earnings which are subject to UK Income Tax, including all pension contributions paid by you or your employer.
You still need to assess the past years using the prevailing rules in those years even if by some minor miracle this headache goes away for you in the future.
If all this information leaves you scratching your head and not knowing where to start, then you are not alone! This is where a financial adviser can help.
Legal and Medical are specialists in the NHS pension scheme and we can help you navigate your way through the minefield. Everyone’s circumstances are different. We can carry out an analysis of your individual situation and provide you with forecasts and a report summarising your situation.
This is a fixed-fee service, so no nasty shocks there either! So please don’t leave an annual allowance tax bill to chance – do get in touch!
Are you going to request your NHS pension statement yet? Let us know by adding a comment below.