The annual allowance limits the amount you can contribute to your pension while still receiving tax relief to £40,000 per year.
However, should you have ‘adjusted income’ over £150,000 you will be subject to a reduced limit known as ‘tapered annual allowance’. This means your annual pension savings allowance may be as low as £10,000.
Remember that ‘adjusted income’ includes private practice profits, dividends, benefits in kind and pension contributions.
Under the new taper rules, the annual allowance rate is reduced by £1 for every £2 of income above £150,000. Your personal allowance could be at a point between £10,000 and £40,000 but you are unlikely to know your level without detailed calculations.
Anyone breaching their annual allowance will pay income tax on the “excess” savings at their marginal tax rate, typically 40 or 45 per cent.
To make matters worse, the NHS Pensions Agency is only required to contact members who are due to breach the £40,000 figure. If you have a reduced tapered annual allowance below this, you may face harsher tax penalties but are not required to receive a warning from the Agency.
A further complication is that you may find that you are restricted from making use of the NHS pension “scheme pays” facility (eg asking the NHS pension scheme to pay the tax charge) for the amount between £10K and £40K.
To talk to an expert about your own annual allowance position, please contact us on 020 7636 7006.