Many doctors have now received letters from the NHS Pensions Agency detailing their annual pension contributions for the tax year 2015/16 and may be shocked to find out how much tax is due on their savings.
Every year these letters cause significant concern to recipients because the figures are often very different to the actual amount of money they believe they have put into their pension pot. This is because HMRC calculates the contributions for a defined benefit scheme such as the NHS very differently to that of a private pension. The figures are based on the deemed ‘growth’ of the pension in that year with an allowance made for inflation.
Not only are the calculations particularly complex but we have come across many letters where the figures are actually wrong. These errors from the Pensions Agency can cause substantial headaches because they can impact the amount of tax which needs to be paid on pensions savings.
The annual allowance which governs the amount that can be contributed to a pension each year while still receiving tax relief was £40,000 for the 2015/16 tax year.
If the allowance is breached, the individual can carry forward any unused allowances from the three previous tax years. If there is still a breach the excess is added to the individual’s income for the tax year and taxed at their marginal rate of income tax so potentially 45 per cent.
It is very easy for busy doctors to unknowingly breach the annual allowance due to NHS scheme membership. Plus, any increase in your pensionable salary because of a statutory pay rise or CEA for example, will increase your pension benefits.
Planning ahead is crucial in terms of managing your pension savings and the tax you owe. For those that do have a breach, there will be options available such as paying any tax charge through self-assessment or possibly using the ‘scheme pays’ route where the pension scheme pays it on your behalf in exchange for reduced eventual benefits.
To make matters worse, since April 2016 for some high earners the allowance has been reduced to just £10,000 because of the new ‘tapered annual allowance’.
Do you know where you stand? It is now of paramount importance to ensure you are seeking the correct advice in this area. For more information, please call one of our advisers on 020 7636 7006.