The pension and pockets of high earning NHS doctors and dentists are likely to be hit hard when new pension tax rules come into force next year. Those who also have a private income may well be forced to look at how they pay themselves too. Why and what is this all about?
Your current annual allowance for pension savings
For most medics, there is a limit to the total amount:
- You can pay into a defined contribution pension scheme, such as a personal pension; and,
- Of benefits that you can build up in a defined benefit pension scheme, such as the NHS Pension Scheme.
The limit is £40,000 a year and is called your annual allowance; if you exceed it, you may be liable to a tax charge.
What is changing?
The Chancellor’s Emergency Budget on the 8th July 2015 announced that, from the 6th April 2016, the annual allowance for higher earners’ pension savings will reduce by £1 for every £2 of income earned over £150,000. The reduction will be capped at £30,000.
What do the changes mean for high earning doctors and dentists?
Let’s say you earn £210,000 or more, your annual allowance will be a mere £10,000 from the 6th April 2016! If you put more than your £10,000 limit into your pension each year, you may have to pay a hefty tax penalty. And that’s not all!
From HMRC’s perspective, your income is calculated in 2 ways: your net threshold income and your adjusted net income. It’s your adjusted net income that determines whether or not you have breached the £150,000 limit†. Calculating this is complicated and best done by your financial adviser or accountant!
Is there any good news for NHS Pension Scheme members?
Yes, there is! From the 9th July 2015 to the 5th April 2016, there are transitional provisions in place* which give a limited window of opportunity for NHS Pension Scheme members.
NHS Pension Scheme members have an £80,000 annual allowance for 2015/2016
Your annual allowance is assessed based on inputs into your pension within a specific time period, called the Pension Input Period (PIP). The PIP currently varies from pension scheme to pension scheme. When the new pension tax rules come into force in April 2016, all pension schemes will have a PIP of 6 April to 5 April.
As part of the transitional arrangements*, a new PIP of the 9th July 2015 to the 5th April 2016 has been introduced, splitting the year into two mini tax years for annual allowance purposes.
The NHS Pension Scheme PIP started on the 31st March 2015 which means NHS Pension members have:
A total of £80,000 annual allowance for the 31st March 2015 to 8th July 2015 period
Up to £40,000 can be brought forward to the 9th July 2015 to 5th April 2016 period
£80,000 annual allowance for pension savings for the tax year 2015/2016
On top of this, the ‘carry forward’ rules still apply which means you can increase your allowance even further with any unused allowances from the last 3 years.
For many doctors and dentists, these transitional annual allowance arrangements should:
- Eliminate or reduce any annual allowance tax charge you may otherwise have incurred; and/or
- Mean you can potentially add more into your pension this tax year.
What action should you take?
Now could be your last chance to place a substantial amount into a pension fund without fear of an additional tax bill. A word of warning though; you need to make sure that you don’t breach the lifetime pension allowance which reduces from the £1.25m to £1m on the 5th April 2016.
If you have private income, in addition to your NHS earnings, and/or salary sacrifice arrangements in place, you may also need to look at how you pay yourself. A check of your annual allowance position, both now and in the future, will be essential to determine if you need to make any adjustments to your retirement plans.
As always, you should speak to your independent financial adviser to find out if and how the upcoming annual pension allowance changes affect you.
How will the announced changes to the annual allowance for high earners affect you? Let us know by adding a comment below.
† unless your net threshold income is £110,000 or less; * subject to passing into legislation