As we draw closer to the end of the 2023/24 tax year, it’s an opportune time for doctors to review their pension planning strategies, especially for those with incomes over £100,000. This period offers a chance to optimise retirement savings and minimise tax liabilities before the 6th of April. This article is dedicated to shedding light on critical tax planning measures, including navigating the nuanced tax implications at this income level, enhancing pension contributions, and preparing for the upcoming pension taxation changes.
Navigating the Tax Implications for Incomes Over £100,000
Income above £100,000 triggers a reduction in the personal allowance, where for every £2 of income above this threshold, £1 of personal allowance is lost. This adjustment effectively increases the marginal tax rate on earnings within the £100,000 to £125,140 bracket, also impacting tax-free childcare eligibility.
Strategic Pension Contributions
A strategic approach to mitigate these tax implications is through additional pension contributions. Such contributions serve to reduce taxable income, possibly reinstating some of the personal allowance and maintaining eligibility for certain tax benefits. A key step in this strategy is performing a ‘headroom check’. This process involves assessing how much more you can contribute to your pension without incurring additional tax charges, ensuring that any extra contributions are within the limits of your annual allowance.
This approach is particularly pertinent for hospital doctors, who might have unique opportunities to adjust their pension contributions. Adjustments could be especially beneficial for participants in the 1995/2008 scheme, where the potential for negative inputs due to high inflation can be balanced with growth in the 2015 scheme. With the annual allowance increased to £60,000 for the 2023/24 tax year, and the possibility to carry forward unused allowances from the last three years, there exists a prime opportunity for enhancing pension savings.
Upcoming Changes in Pension Taxation
The pension framework is poised for significant changes from 6th April 2024, with the current Lifetime Allowance making way for the Lump Sum Allowance (LSA). Under the new system, only lump sums above the LSA, which will be £1268,275 for those without lifetime allowance protection, will attract tax when benefits are claimed. This shift eliminates the additional tax on income above the previous Lifetime Allowance, making it an even more compelling reason to consider increasing your pension funding now.
For those who may have previously chosen to opt out of their pension scheme, revisiting this decision is worthwhile, given the forthcoming more favourable tax treatment of pensions. Re-engaging with your pension could be a prudent move to secure financial stability in retirement.
Utilising ISA Allowances
Beyond pension contributions, maximising your ISA allowance offers another avenue for tax-efficient savings. With a limit of £20,000 for the 2023/24 tax year, ISAs provide a valuable tool for tax-free growth and withdrawals, complementing your pension efforts.
With the tax year nearing its close, taking proactive steps in pension and tax planning is essential. For tailored guidance, engaging with a financial adviser is recommended to align your strategies with your long-term financial objectives.
Disclaimer
The information provided herein is based on current tax laws and regulations, which are subject to change.
The Financial Conduct Authority (FCA) does not regulate tax advice.
Please be aware that the value of investments can fall as well as rise, so you could get back less than you invest. Past performance is not a reliable indicator of future results.
The above is not individual financial advice.
Content correct at time of writing.