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Taking care with the taper

The tapered annual allowance potentially affects doctors with higher levels of taxable income and could limit the tax-efficient pension provision you are able make. It’s crucial to check whether you’re affected.

Are you caught by the tapered annual allowance on your pension saving? For doctors with higher levels of taxable income, the answer may well be yes, potentially exposing the unwary to additional tax charges, so it’s important to understand how the rules work.

What is the annual allowance taper?

For most doctors, the standard annual allowance is £40,000 and pension funding above this level is subject to a tax charge. For defined benefit schemes such as the NHS pension scheme, it isn’t contributions to the scheme that are tested against the annual allowance – but a multiple based on the amount by which your NHS Pension Scheme benefits increase in value during the course of a single tax year.

The annual allowance also includes any money purchase pension scheme contributions you may make, such as money purchase AVCs or contributions to a personal pension plan.

The NHS Pension Scheme* sends an annual allowance statement to doctors who exceed the standard annual allowance, usually by 6th October following the end of the tax year in which the breach occurred. That assumes all relevant information is available from your employer (if not, the scheme has to send you a statement within three months of receiving the information).

For some doctors, however, the annual allowance may be lower than £40,000. In April 2016, the Government introduced the tapered annual allowance, targeted at savers with higher taxable incomes. The taper potentially applies to any doctor with taxable income from any source of more than £150,000 during the tax year. It is important to note that this figure includes your employer’s share of any pension growth, which we will explain in more detail shortly. This income figure is referred to as adjusted income.

How much does the annual allowance taper reduce your allowance?

The taper reduces the £40,000 annual allowance by £1 for every £2 of income you receive above the £150,000 threshold. So a doctor with adjusted income of £180,000, say, would be entitled to a tapered annual allowance of £25,000. Once adjusted income reaches £210,000 or more, the minimum annual allowance of £10,000 applies.

Doctors who think they might be vulnerable to these adjustments need to check their position carefully, because the rules are applied according to some very specific definitions of income as stated above. Firstly, you need to check whether your “threshold income” is more than £110,000 – your threshold income is broadly your taxable income from all sources minus the contributions you make into the NHS Pension Scheme, and minus any other contributions you make into any other pension arrangement.

If your threshold income is indeed above £110,000, you will need to calculate your “adjusted income”. Broadly, this is your threshold income plus any growth in your NHS pension or any other defined benefit pension scheme that you are an active member of such as the University Superannuation Scheme (USS) or Armed Forces Pension scheme. On top of this you also need to add any contributions made into money purchase pension arrangements (such as money purchase AVCs or personal pension plans). This also includes the money purchase element of the USS scheme where appropriate. So to be clear, for any defined benefit scheme like the NHS Pension scheme it is the growth in your pension benefits, not your own personal contribution nor that of your employer that you need to include. If your adjusted income exceeds £150,000, the tapered annual allowance will apply.

Importantly, it is the individual doctor’s responsibility to check their own threshold and adjusted income levels – and therefore to work out what tapered annual allowance they are subject to. You’ll only receive an annual allowance statement from the NHS Pension Scheme if your pension growth is above the standard annual allowance of £40,000.

Bear in mind too that the information with which the NHS Pension Scheme calculates your annual allowance growth or input will only take into account your NHS pensionable income. So if you have non-pensionable NHS income such as additional programmed activities, or income from insurance company medicals, or any other non NHS income – from private practice, property rentals or savings interest to name but a few, the NHS Pensions Agency will not be aware of this. Nor will the scheme have any information on additional pension contributions you make into other arrangements.

The bottom line here is that you could still be subject to the tapered annual allowance even if it isn’t immediately obvious from the NHS Pension Scheme’s annual allowance statement. It is crucial to remember you will only get a statement automatically if your input or growth exceeds £40,000.

Requesting an annual allowance statement

Certainly, if you feel there is any possibility of you being affected by tapering – especially if you have income from any other sources including non-pensionable NHS income or you are making contributions into any other type of pension arrangement – you should request an on-demand annual allowance taper statement from the NHS Pension Scheme in order to confirm your current position.

The good news is that the rules for ‘Scheme Pays’ in respect of individuals in England and Wales affected by the Tapered Annual Allowance have recently been relaxed. This change will take effect for liabilities arising from the 2017/18 tax year. The rules are now aligned to those already in place in Scotland, A further article on Scheme Pays will follow next month to explain what it is and how this works for those affected.

In addition, think seriously about taking independent financial advice – both to be sure you can calculate your exact position in the right way and to consider ways to mitigate any potential problems you have with the tapered annual allowance.

For advice tailored to your profession, call Chase de Vere Medical on 0345 609 2008 or click here to arrange an appointment.

*Any reference to the NHS Pension Scheme also relates to the SPPA in Scotland and the HSC in Northern Ireland. In terms of the change to scheme pays we are still awaiting clarification regarding any updates to the HSC scheme in Northern Ireland.

The Financial Conduct Authority does not regulate tax advice.

Content correct at time of writing and is intended for general information only and should not be construed as advice.

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