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Tapered Annual Allowance Top Concern For High Earning Healthcare Professionals

If the tapered annual allowance all seems a bit complicated, you’re not alone. The calculations for adjusted income and threshold income (benchmarks used in tapered annual allowance) are highly involved and best done by a professional.

This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

In fact, the year the concept was introduced, reports of annual allowance breaches doubled – that’s a lot of people who could have benefitted from a little help.

It’s no wonder the tapered allowance is a top concern for individuals seeking out professional financial advice. It’s a more common problem than you might think with the bar set at £150,000.

Almost three-quarters (73%) of financial advisors that reported to Prudential Research have had clients impacted by the tapered annual allowance.

What is the tapered annual allowance?

From April 2016, the government introduced a reduced annual allowance for individuals with an adjusted income (all taxable income and pension savings minus certain tax reliefs) of over £150,000.

The reduced annual allowance means that for every £2 over £150,000 an individual makes, their allowance is reduced by £1, with a minimum annual allowance set at £10,000.  If your threshold income (income less employer pension contributions) is no more than £110,000, your income will not be subject to the tapered annual allowance.

As many healthcare professionals do indeed reach that level of income, it’s a very real concern. But what can you do to help prevent your adjusted income skyrocketing and your tapered allowance plummeting?

The power of pensions

As the entire concept of the tapered allowance focuses on adjusted income and threshold income, one of which includes pensions (adjusted) and the other doesn’t (threshold), we advise working through the threshold number first and moving from there to understand how much you should be contributing to pensions.

Once again, the magic number we’re working with is £150,000 before tapering kicks in.

Say your threshold income is £135,000, you would have £15,000 worth of contributions available before being subject to an annual allowance charge. Anything over that would result in a charge, barring any unused carry forward allowance from years prior.

It’s important to be aware of exactly how much will be contributed to your pension pot as you will be subject to an annual allowance charge when it exceeds the tapered annual allowance, even if they’re from your employer. It doesn’t matter if they’re actual contributions or benefits accrual, it’s all the same to HMRC.

Carry forward

The good news for many individuals is that you can use ‘carry forward’ when dealing with the tapered annual allowance, meaning you can apply any unused allowance from up to three previous years.

If your income is subject to the tapered annual allowance regulations in a carry forward year, then what you can carry forward will be based on that amount. For example, if you plan to carry forward this tax year and £6,000 worth of contributions were made, then there will be £4,000 of unusual annual allowance to carry forward.

Work with the pros

There’s a lot at stake when working out exactly how you’ll be affected by the tapered annual allowance so it’s well worth consulting a professional who can help you allocate your savings in the smartest way.

Don’t hesitate to reach out to us so we can help you save the most money possible and avoid any negative consequences as a high-earner.

Want help with financial planning?
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Dental & Medical Financial Services have been helping doctors and dentists to build and protect their wealth, whilst saving tax for over 25 years.
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Tel: 01403 780 770


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