Understanding the pension annual allowance and how it can affect you can be overwhelming. We regularly have doctors contacting us for help on the allowance and how it relates to the NHS pension scheme. Here, our expert answers your questions.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
To help you understand the annual allowance a little better, and how it affects you, we put some of the most commonly asked questions to our financial expert, Darren Scott Guinness.
Here, Darren answers 5 of the most common questions being asked by doctors today.
1. What is the Annual Allowance?
Designed to cap the money saved each year into your pension fund before a tax charge applies, the annual allowance is used mainly to inhibit the rich in profiting from huge pension tax relief. The current threshold lies at £40,000 making it highly probable that you will breach the allowance limit.
Read more: HMRC Failing to See Taxpayer Confusion about Pension Allowance
2. Why do doctors linked to the NHS pension scheme suffer?
Doctors who are members of the NHS pension scheme cannot lower their pension contributions due to it being a defined benefit scheme linked to salaries and income, so many breach the allowance simply based on how much they earn.
3. What is tapered annual allowance, how does it affect doctors?
The intention of the tapered allowance is to prevent the pension tax relief that high earners were reaping rewards from, as a result of large pension savings. Doctors are forced to pay higher levels of tax in the NHS pension scheme, so many doctors have abandoned the scheme completely. In the hope of keeping their income down to avoid the high pension tax charges, doctors are also turning away supplementary work.
Keep informed: Keep abreast of changes in the NHS – subscribe to our NHS Announcements mailing list, we will keep you regularly updated with any changes you need to be aware of.
4. Can you work out my allowance?
Put very basically, if you earn over £150,000 then your annual allowance will be reduced by £1 for every £2 you earn over £150,000. It is not an easy feat to work out, involving intense calculations that are crucial to get right. Getting a professional IFA or account to work out your annual allowance calculations can cost upwards of £1,000. Dental and Medical will calculate your finances free of charge and let you know if you’re at risk of climbing over the threshold.
Read more: Tapered Annual Allowance Top Concern For High Earning Healthcare Professionals to understand how tapering works.
5. If I’ve breached the annual allowance what can I do?
If you earn close to £130,000 then you need to be on guard. Ask the NHS Pension Scheme for a statement showing your pension saved over the last few years. You need to include this on your annual tax return. If you’ve exceeded the allowance you may need to review your overall pension circumstances.
Get in contact with a financial adviser who will look at your finances and work out your adjusted income and tell you whether you have the option to carry forward.
Ask the experts
Working out taxes, pensions and incomes can be confusing if it’s not something you do on a daily basis. This is where we can help you. Having dealt with doctors’ financial affairs for over 30 years – Darren Scott-Guinness is an expert in the field and is working with hundreds of doctors to help understand and work on ways around the NHS pension issue.
Have a question you want answered? Contact us with your financial questions.
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