The calculations for your annual allowance are important and will have an impact on the amount of tax you will need to pay.
The annual allowance limits pension savings contributions which qualify for tax relief to £40,000 for those with ‘adjusted income’ less that £150,000. For those who earn more than this figure – including private practice work, benefits and pension contributions – the limit is reduced on a tapering scale down to a possible £10,000 per year.
For money purchase pensions, the value of contributions are taken at face value so if your contribution is £500 gross per month (after basic rate tax relief) your pension ‘input’ is therefore £6,000 for the tax year.
For defined benefit pension schemes such as the NHS pension, the contributions for the year are calculated as the ‘growth’ in the pension. The accrued benefits are measured at the start of the input period and again at the end of the period. An allowance for inflation is made (currently linked to the Consumer Prices Index) and the difference between the start and end values are deemed to be the ‘input’ for the year.
Any increase in benefits such as an extra year of service accrued or an increase in pensionable salary will count towards the input. A pay rise given through a contractual obligation, a clinical excellence award, making management positions pensionable or a simple statutory rise could generate a tax charge.
Note that the onus is on the individual to inform HMRC if the annual allowance has been exceeded.
For most busy doctors, life could be much simpler talking with a team who make the annual allowance their business.
For a thorough check of your financial position, please contact us on 020 7636 7006.