The tapered annual allowance has become such an issue with dental and medical professionals since its introduction in 2016 that the British Medical Association has approached NHS employers with the ask that they propose new solutions to the pension issues their members are facing and put forth a reform of the current pension tax laws.
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.
The problem has escalated so much that doctors are turning down extra work to avoid skyrocketing tax bills related to their pensions.
In fact, many have worked out that they could get a higher pension by working part-time instead, with many consultants limiting their income by ceasing overtime work such as programmed activities.
What are the consequences?
Beyond hitting high earners where it hurts – their wallets – the real victims of professionals cutting back on work is the UK public who lose access to educated, experienced doctors and dentists.
A further effect of the allowance is that the number of members leaving the NHS Pension scheme is five times higher than any other public pension funds. The BMA has intervened on their members’ behalf and is urging Chancellor of the Exchequer, Phillip Hammond, to solve the issue with tax reform.
Brief background of the tapered pension allowance
The tapered annual allowance is set up so that for every £2 of income above £150,000 a year, the allowance is reduced £1. For high earners, this is particularly irksome because it systematically decreases the allowance they are entitled to, which means they are subject to an annual tax charge on their contributions and a lifetime allowance tax levy on their benefits.
Since most consultants are unable to pay these hefty tax bills from their income alone, the only option they have to pursue is to dip into their pension to pay for annual allowance breaches using the NHS scheme pays option.
Passing the buck
Darren Scott-Guinness, our lead financial adviser and financial planning expert, said “Another aspect of the tapered annual allowance doctors take issue with is that the onus to check if they have been impacted and owe any tax charges is now completely on them. It has taken thousands of people by surprise and has left the tax bills unpaid and ever-increasing.”
This is now causing people to seek professional advice – to take care of their past problems and avoid any future ones. The calculations on which the tapered annual allowance are based on are complicated and require an expert financial adviser.
Darren continues, “In short, they’re related to your full income tax situation, but employer or pensions schemes are irrelevant. According to the BMA, every senior clinician will be impacted by either excess pension growth, tapering, or both.”
We can help with our no-cost calculations
As part of our services to our clients, we provide carry forward and tapering allowance calculations that will help determine whether or not an excess tax charge will be forthcoming, and if so, provide guidance on the best options to deal with the bill.
If you do need to settle any tax bill, you can always go with the scheme pays option but don’t forget about self-assessment.
If you do wish to use scheme pays, the deadline for election is 31st July 2019.
Dental and Medical Financial Services has years of tax and pension planning experience and a wealth of knowledge around threshold and adjusted income, pension growth values, carry forward, and tapering allowance calculations — all necessary to calculate whether or not you’re at risk. Get in touch with us today to get on top of your tax situation.
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