In October, pensions agencies began sending out statements for the 2021/22 tax year. With your statement, your pension scheme provider will have included the details you need in order to estimate your tax position. Like many others, GPs are required to do these calculations themselves to determine what they will owe and apply for scheme pays to take care of the charges.
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.
But in recent years there has been an increase in taxes and lots of changes to pension allowance thresholds that have made calculating what you owe incredibly difficult. For more on what to do once you have received your pension statement, read on.
Tapered annual allowance
Changes to pension annual allowances means that doctors are being excessively taxed on their pensions. Your annual allowance threshold limits the amount of money you can save into your pension each year before you are subject to tax charges. The calculations to figure out what you owe involve knowing the difference between adjusted and threshold income. Adjusted income includes pension contributions, while threshold income excludes it. When it comes to the NHS pension scheme, in order to get your adjusted income, pension growth is added to your threshold income.
If your threshold income is less than £200,000, you don’t need to worry about tapering. But the current rules state that if your threshold income is above £200,000 and your adjusted income is below £240,000 you will be subject to the standard annual allowance of £40,000. However, if your threshold income is above £200,000 and your adjusted income is above £240,000 then your annual allowance will be subject to tapering. The tapered allowance dictates that for each £2 over £240,000, your annual allowance threshold is reduced by £1. For those whose adjusted income exceeds £312,000, their annual allowance is reduced to just £4,000!
The problem is that the NHS pension scheme has no way of knowing if your allowance will be subject to tapering and if you exceed your contributions you may face a hefty tax bill as a result. If you suspect that your income will fall under tapering thresholds, it’s best to stay on top of things and ensure you’ve thoroughly reviewed your statement.
What if I exceed the limit?
If you find that you are approaching or have surpassed the threshold for tapering, there are options. You are allowed to carry forward any unused allowances for up to three previous tax years in order to offset some of the liability. You are only liable for paying the additional tax if you don’t have any allowance to carry forward or if the amount isn’t sufficient to cover the gap. It is simply added to your taxable income for the year and will be subject to your marginal rate.
How to pay
Everyone is able to pay any charge owed via the completion of a self-assessment tax return. You can also opt to voluntarily pay through scheme pays if your growth does not exceed the standard annual allowance of £40,000 and other conditions are met and scheme pays is mandatory if your growth exceeds the standard limit.
Professional advice for your pension
Pension allowances are complex and in order to guarantee accuracy, the best thing to do is work with a financial advisor to work out your tax obligations. As part of our client commitment, Dental & Medical Financial Services provides the carry forward and tapering calculations free of charge. If you want to ensure the calculations are correct and to potentially save thousands in tax, get in touch with us today.