Update for Doctors on Annual Allowance & Scheme Pays Rules
Pension Rules have changed, Yippee!!
Hello, I hope you are all well, fit and happy. Before I go any further on information on tax and pensions I just want to say 1 thing;
Doctors, Nurses, NHS staff, Cleaners, Care Workers you are all amazing and doing a brilliant job. So a big thanks from the team at Clinic Alchemy. Well from everyone really. You are just Superstars and I look forward to having a huge party to celebrate your work once we are allowed out.
The above is not enough on how I feel, however I’m here to give you information about ££ not to show my gratitude, although it is there in abundance. So I’m going to move on to my latest blog. In this blog I am going to give you an update on the pension rule known as ‘annual allowance’ and how you can pay the annual allowance tax charge. I will keep it short and sweet as I’m sure you have other things to do.
To recap, the annual allowance is a rule on how much you can contribute into a pension without being hit with a tax bill. If at this point you have no idea what I am talking about (this happens a lot) please refer to this blog first;
If you vaguely remember what I am talking about here is a quick recap; the amount you can contribute into a pension is 100% of your earnings up to £40,000 (the annual allowance). However if you earn ‘too much’ you are subject to the ‘tapered annual allowance’. Here the amount you can contribute into a pension (the annual allowance) decreases by £1 for every £2 over the earnings threshold. The minimum tapered annual allowance is £10,000. The tapered annual allowance applies to individuals whose total income (everything you earn, including interest on cash accounts) is above £110,000 and your adjusted income including employer pension contributions exceeds £150,000. If you exceed this then you will be subject to the tapered annual. If you contribute more into a pension than your available annual allowance you will be taxed on the excess contribution. Unfortunately many people in the NHS were caught up in this rule and were subject to an annual allowance tax charge.
However, there was a big call to action and the government has acted.
The ‘threshold’ and ‘adjusted income’ levels have increased. So now you are only subject to the tapered annual allowance if your earnings are over £200,000 (threshold) and £240,000 (adjusted). So for those of you with just NHS earnings you should be in a better situation and will hopefully have the full £40,000 annual allowance, which, if you just contribute to the NHS pension and no other pension and have no other income from any other source will mean that more than likely you will NOT be subject to the annual allowance tax charge.
There is a catch
The tapered annual allowance will now decrease to a minimum annual allowance of £4,000.
So, if your adjusted earnings are in excess of £300,000 you will be in a worse situation and your tax bill will be higher.
If you are still caught in the trap I would suggest you speak to an IFA and or accountant for further guidance on what can be done if anything (to mitigate this).
The above rule came into play for the 2020-2021 tax year.
What about the tax due from excess pension contributions last tax year?
Also good news
Last year I was flooded with the question from people in the NHS; ‘should I pay the tax charge or let the scheme pay’ and we had to do clever calculations using assumptions to see what the best outcome was.
The NHS has confirmed that if you are an NHS clinician and exceed the annual allowance in the 2019-2020 tax year from your NHS pension, they will pay the tax charge and it will not affect your pension. If you don’t believe me check out this the source of the information:
So good news for NHS clinicians!
Confusing subject so sorry my short and sweet blog was not that short, but at least it is sweet for most.
Finally as a way of saying thanks I’m offering the first 50 NHS clinicians free financial advice. I will do more if I can I just don’t want to overpromise. So feel free to get in contact if you have questions no matter how big or small.
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