Changes announced in March’s budget mean the pain of pension tax has been relieved for many doctors – but not all will be pain-free.
Amid the heroic efforts of recent months, many doctors have had little time to draw breath, let alone to review changes to rules that potentially have a significant impact on their pensions. But the reforms to pension taxation introduced back in March to prevent doctors from losing out financially when taking on extra shifts – are important to understand.
Not least, it is vital to recognise that the changes do not eliminate the risk of doctors being hit with potentially sizeable tax bills. On 12 March – 11 days before lockdown – the Chancellor of the Exchequer announced major changes to the “tapered annual allowance”, which reduces the pension savings[SR1]* that people with a taxable income of more than a certain amount may make before being charged additional tax. But Rishi Sunak did not abolish the taper altogether, despite widespread criticism of its complexities, so some doctors may still be caught by it.
What has changed with the tapered annual allowance?
Under Government rules on pension savings*[SR2], most people qualify for an annual allowance equivalent to their annual earnings, up to a limit of £40,000. This allowance has not changed and will still mean that many doctors will have some element of tax charge on their pension savings. However, some with higher levels of taxable income get a reduced annual allowance.
In the 2019-20 financial year, this applied if you had a threshold income of more than £110,000 and an adjusted income of more than £150,000. Your threshold income is your taxable income, including earnings from all employment as well as income from other sources such as rental properties, investments and pensions, less any contributions to money purchase pension arrangements**; your adjusted income is your threshold income plus the value of of your[SR3] [AS4] pension savings*.
For those doctors who fell into this category, their annual allowance tapered down by £1 for every £2 over the £150,000 adjusted income amount– to just £10,000 for those with adjusted incomes of more than £210,000. This increased the risk of them exceeding their annual allowance through their membership of the NHS Pension Scheme – and receiving a tax bill as a result.
Mr Sunak’s announcement in March did not change this system. Instead, the Chancellor raised the two thresholds by £90,000 for the new financial year. So, for 2020-21, doctors who do not have a threshold income above £200,000 and an adjusted income above £240,000 need not worry about the tapered annual allowance.
Above these levels, however, tapering remains in place – and has effectively been extended. As before, you lose £1 of annual allowance for every £2 you are above the adjusted income, but this applies all the way up to £312,000. For people above this limit, the tapered annual allowance will be just £4,000 – compared to the previous minimum of £10,000.
Am I affected by the changes to the tapered annual allowance?
The Chancellor’s reforms will naturally mean that far fewer people are subject to the tapered annual allowance in 2020-21. But when making the announcement, Mr Sunak conceded some doctors would still be affected. His estimate was that the changes would take around 98% of consultants and 96% of GPs out of the taper.
That means significant numbers of doctors will still need to review their pension position.
There are ways to mitigate the problem. In particular, the carry forward rules allow you to bring forward unused annual allowance from the past three financial years, adding it to this year’s allowance. But bear in mind that if your allowance was tapered in any of those years, it will be this test that applies when working out how much unused allowance you had. And the taper would be calculated on the basis of the £110,000 and £150,000 threshold and adjusted incomes – not the more generous tests that have now been introduced. It is therefore unlikely that many doctors affected by the taper will have significant amounts of unused allowance to carry forward.
The bottom line is that doctors still at risk of tapering need to take specialist tax and financial advice on what their exact position is – and how to manage it in the most effective ways possible. If you’re not sure whether you’ll be caught by the taper, or if you think it is likely that you will be, seek specialist advice on the best way forward.
*In the NHS Pension Scheme and other defined benefit scheme the term pension savings refers to the growth in your pension benefits, after allowing for inflation, over a given tax year. This is often referred to as the pension input amount
**for defined benefits pension schemes such as the NHS pensions scheme your pension contributions are deducted before your income tax is calculated.
[SR1]Pension savings is typically interpreted as referencing to the total pension value someone has not the amount they put in. Suggest a change to pension contributions.
[SR3]….your and your employer’s pension contributions.
[AS4]This is incorrect when referring to a DB scheme as it is the pension input amount that is added to threshold income.
Content correct at time of writing and is intended for general information only and should not be construed as advice.