Annual allowance pension woes

Annual allowance – don’t you just want to scream?

Currently the annual allowance for each taxpayer is a maximum of £40,000. For ‘high earners’ tapering can reduce this to just £4,000!

Looking back – In April 2006, when the pension savings annual allowance was first introduced, the annual allowance was £215,000. This rose to £255,000 in subsequent years. Medical professionals never gave pension tax charges a second thought, but now it is top of the tax misery agenda.

Many doctors are likely to be a member of the 1995/2008 NHS pension schemes, in addition to the 2015 NHS pension scheme. Currently it is the combined pension growth of both schemes that determines if a pension tax charge arises.

McCloud judgement – because of the McCloud case, the total growth figures for previous years are likely to alter. However, legislation means that for years up to 2021/22, pension tax charges have to be calculated using current rules.

Annual allowance – £40,000 or maybe the minimum £4,000?

At present the maximum annual allowance is £40,000. The allowance is tapered when income limits are exceeded as follows:

  • Threshold income is more than £200,000;
  • Threshold income, together with your total pension savings growth, is more than £240,000.

It is important to remember that your threshold income is your total taxable income from all sources, not just your NHS salary. Additional private practice income, rental income and investment income can often mean the £200,000 threshold income is breached.

Tax Tip – depending on the level of your self-employed private practice income, consideration should be given to given to incorporating this income to a different legal entity such as a limited company.

If you find yourself with a pension tax charge, then the tax liability can be paid as part of your self-assessment tax return or by using the ‘NHS scheme pays’ option. Advice should be taken to determine the best option for you.

McCloud judgement

As mentioned above, the pension annual allowance position is currently based on the total growth of both schemes. The McCloud judgement means that the pension scheme growth for the period 1 April 2015 to 31 March 2022 will be recalculated on the basis that the 2015 pension scheme had never existed (the writer has assumed all years will be recalculated)

The recalculated pension growth could mean that significant tax refunds are due to those who chose to pay the pension tax charges as part of their self-assessment tax return.

For those that have used NHS pension scheme elections, it will be important for the NHS pensions agency to have either received amended elections for reduced tax charges or indeed, remove original elections if the recalculated growth means no pension tax charges actually arose.

It is imperative that you keep detailed records of all ‘scheme pays’ correspondence as these are crystalised before your retirement pension is calculated. You would not want any erroneous ‘scheme pays’ elections being on your record.

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