Pension Annual Allowance
25.09.2018 , BY Anil Sookharry
25.09.2018 , BY Anil Sookharry
Every taxpayer has a pension annual allowance of £40,000 unless you are subject to the taper. For most people, who pay into a private pension, it is the actual pension contribution which is compared to the annual allowance but, for GPs on the NHS pension scheme, it is the growth in your pension which is deemed to be your pension contribution which is compared to the annual allowance. If the NHS pension growth exceeds the maximum limit of £40,000, then tax is payable on the excess pension growth. However, you can elect for this additional tax to be paid out of your pension pot through an “NHS Scheme Pays election”. When we prepare your tax return, we will estimate your pension charge and we will let you know and send you the election form to elect for the tax to be paid by the NHS Pension Agency from your pension pot. The reason for doing the Scheme Pays election is purely for cash flow reasons, which means that you do not have to find the cash to pay for the extra tax on the pension.
If your pension growth was below £40,000 in the past three years, you will have some unused allowance from previous years. This can be carried forward for three years.
Your standard annual allowance of £40,000 will be tapered down to a minimum of £10,000 if your threshold income is above £110,000 and your adjusted income is above £150,000. The £40,000 maximum limit will be reduced by £1 for every for every £2 that your adjusted income is above £150,000, so if your adjusted income is more than £210,000, you will only have a tapered annual allowance of £10,000. In simple terms, threshold income is your taxable income, so this will include other earnings including property income and dividends and after deduction of pension contributions. Adjusted income is your taxable income plus your deemed growth in the NHS pension scheme.
If you want to reduce your annual tax allowance charge, you would need to reduce the growth of your fund. This could be by leaving the scheme for a short period of time - you will still benefit from the pension growth and you can use up any relief that would have been available to you in the years you were not in the pension scheme when you re-join the pension scheme. It means your pension will grow more slowly, but it will reduce the tax on your pension. Alternatively, some people leave the scheme completely and hence, do not have tax to pay on their pension and neither do they receive tax relief on the contributions as there are none, so their overall tax liability will increase. However, do note that, if you are out of the scheme for more than five years, you will lose those five years’ of growth. If less, you will retain growth for each of the years for which you are not in the scheme.
The most important thing is that we get your pension information to get an idea of the size of your pension and a better idea of the growth and any unused relief. There are two documents that help us with this:
Once we have the above information, we can make a more accurate estimate of your pension growth and tax implications regarding your pension.
It is also a good idea to get some detailed financial advice, as this will help you assess your options and give you advice on the best route for you depending on your personal circumstances. You must obtain advice if you want to temporarily or permanently leave the scheme.