If you’re a high earning dentist or doctor, there’s a chance you may be in danger of losing some of the benefits associated with your pension. You might even be the recipient of an unwanted tax bill if you fail to plan accordingly. What tax hits may be coming your way and what can you do about them?
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.
If you go over your pension allowance (the amount of money you can contribute to your pension annually without being subject to an additional tax charge) then you should expect a tax bill at the end of the year.
What’s happened?
In April of 2016, HMRC introduced the Government’s Tapered Annual Allowance rules which state that any NHS doctor or dentist who brings in over £150,000 a year in income and pension benefits will most likely have a pension allowance less than the standard £40,000 a year – some taxpayers may only get as little as £10,000!
NHS dentists and general practitioners, who are typically high-earners, are particularly susceptible to this situation.
Especially after the 4.5% increase in the value of earnings last tax year, many in the medical and dental field are in danger of exceeding the £150k maximum.
This means if, between yourself and your employer, you contribute more than your allowance, you’ll be responsible for paying tax on anything that exceeds it.
Is your pension affected?
Calculating what your annual allowance will be is no easy feat. You need to factor in the total amount of money you have earned as well as the specific contributions across all your pensions to determine what your allowance will be. Another factor to consider is your unused allowances from previous years as you’re allowed to carry forward any surplus you may have from up to three years prior.
If you only have a personal pension, then your pension input (also known as your deemed pension input) can easily be calculated by figuring out how much money was added by yourself and your employers in the tax year.
If you’re a member of the NHS Pension scheme, working out your pension input can be incredibly involved because the HMRC will review the value of your NHS pension at the beginning and end of the year.
Further complicating matters, some individuals have both a personal and an NHS pension, so both of these calculations will need to be done separately and then added together, ensuring two separate methods are used for each pension.
The calculation used for individual income allowance is not just based on your straightforward income – you need to take into account earned vs unearned income, dividends, rental income, taxable and non-taxable income, threshold income, and adjusted income.
We cannot stress enough how important it is to ensure the end result of your summation is correct so we strongly urge you to work with a professional to guarantee that it is.
Take action
As you can see, your pension contributions have got a bit more complicated than they used to be.
A great place to begin is to request your Annual Allowance Pension Savings Statement so you and your financial advisor can review your current state of affairs and discuss the best course of action for the future.
At Dental and Medical Financial Services, we know how important it is for higher rate earners to save as much tax as possible.
We’ll work with your accountants to recommend a financial plan that helps to reduce your tax liability as much as possible by claiming the most expenditure possible against your business and ensuring you are trading in the most tax-economic framework.
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