Annual Allowance: Pension Rules for Doctors

There are loads of articles floating around at the moment about pensions and doctors (or many people with a final salary pension) getting hit with unexpected tax bills. Sorry, it is true. So today I want to give you an introduction into what these pension rules are. In my follow up vlog I will explain in more detail the NHS pension and show you how to calculate if you are going to get a tax bill and things for you to be aware of going forward.

Now please don’t despair. If you believe you are, or will be, affected by these rules, it doesn’t mean that you can’t save for your retirement. It just means we need to be slightly more intelligent about how to plan for your retirement.

3 rules to cover;
Annual allowance
Carry forward
Lifetime allowance

Rule 1. The Annual allowance

How much you can put into a pension in a given tax year
Form most it is a gross contribution of £40,000 (so £32,000 net) or 100% of your earnings if less.

However there are 2 exceptions to this;

  • Those have accessed there pension – in which case they will be subject to the money purchase annual allowance of $4000.
  •  Those who’s threshold earnings are over £110,000, by threshold I mean basically everything you get paid, employment income, rental income, dividends etc, and adjusted earnings (including pension contributions) are over £150,000. If you fall into this category your annual allowance will be reduced for £1 for every £2 you go over the adjusted income up to a maximum reduction of £30,000. So for the math geniuses out there if your ‘adjusted income is over £210,000 then your annual allowance will be reduced to £10,000 for that tax year. This is known as the tapered annual allowance.

If you exceed your annual allowance you may be subject to tax at your marginal rate on the excess contribution. However you are eligible to carry forward any unused allowance from the preceding three tax years.

Rule 2. Carry forward

You are able to carry forward unused allowances from the preceding three tax years. The annual allowance for the last 3 tax years was;

• £40,000 for the tax year 2014/15
• Potentially £80,000 for the tax year 2015/16. £40,000 prior to July 8th £40,000 post July 8th(
• £40,000 for the tax years 2016/17
• £40,000 but subject to taper for 17/18
• And the same for 18/19
So this means you can carry forward unused allowance from the potentially very nice year of 15/16 of £80,000. This will help those with an annual allowance of £10,000. But remember you can only carry forward the last 3 years, so if you have capacity it may be an idea to use up any allowance you have left from 3 years ago as this will be lost come April.
I’m sorry this is so confusing it is not me that makes the rules! If you sufficient carry forward allowance then you can claim this and therefore you will not be subject to tax on your pension contributions. If however you do no then I’m sorry to say you will have to pay the annual allowance charge and it will be taxed at your marginal rate.
Ok so the last main rule, (is anyone still there)

Rule 3. The lifetime allowance.

The lifetime allowance is all about how much you can save into a pension tax efficiently. It used to be £1.8 million, it is currently £1,030,000 and will increase in line with inflation each tax year.

On taking the pension if you are over the lifetime allowance and have no protection in place, then the excess will be taxed. If the excess is taken as a lump sum it will be taxed at 55%,if taken as an income it will be taxed at 25% in addition to your marginal rate of tax.

So there is a summary of 3 rules, quite evil I know, I’m sorry. Does this affect you? It could well do. Don’t despair or panic, the first thing I would suggest is to have a look at your pension benefits accrued privately and with the NHS. From there we can do a calculation to see if you are affected by any of the rules and if you are what you should do about it.

In my next vlog I will explain more about the NHS pension and how you can find out what you have built to date. In the meantime if you want further information feel free to check out my blog – sting in the tail which gives you a worked example.

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