In autumn every year, the NHS Pensions Agency issues letters detailing doctors’ annual pension contributions for the preceding tax year but only if the doctor has ‘growth’ in their pension pot of more than £40,000.
The £40k figure is set at the standard annual allowance rate – the amount which can be contributed to a pension each year while still receiving income tax relief.
However, there is a new ‘tapered’ annual allowance for those with “adjusted income” over £150,000 which reduces this figure further, down to just £10,000 for many doctors. Remember that “adjusted income” includes private practice profits, dividends, benefits in kind and pension contributions.
Anyone breaching the reduced annual allowance – at whatever level is relevant to them – will pay income tax on the “excess” above £10k at their marginal tax rate, typically 40 or 45 per cent.
Thus, if your pension ‘grows’ each year by more than £10,000 you could face harsh tax penalties but will be unaware as only those saving over £40,000 per year are required to receive the warning letters. A further aggravating factor 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 charge) for the amount between £10K and £40K.
You should request your own Annual Allowance Pensions Saving Statement from the NHS Pensions Agency as soon as possible. The NHS is not the fastest at responding to requests. You will need to allow considerable time for the source data to be checked before your tax return deadline.
Not only are the calculations particularly complex but we have come across many letters where the sums are wrong – causing substantial headaches for the recipients and impacting the amount of tax which is due. Seek help as soon as you can.
For specialist retirement planning advice, please contact us on 020 7636 7006.