Most people don’t need to spend a lot of time thinking about their pension contributions while they’re working, or the complex tax rules that apply.
But many senior NHS doctors have been forced to make difficult decisions about the hours they work, as pension rules have seen them facing unexpected, large tax bills.
In some cases, doctors have been reducing their hours, leaving the NHS pension scheme, or taking an early retirement to avoid the charges.
At the root of the problem is the tapered annual allowance, which reduces the tax-free allowance on pension contributions for high net-worth individuals.
It could affect high earners in any profession, but it has a pronounced impact on senior medical professionals because of their often unpredictable working patterns.
NHS Providers , the membership organisation and trade association for NHS services, said “significant numbers” of key staff can no longer afford to take on extra shifts and weekends because of the tax penalties they would incur.
That has a knock-on effect for patients in England, with the BBC reporting that waiting lists for routine surgery have increased by up to 50%.
In June 2019, the Department of Health and Social Care proposed to solve the problem with more flexible pensions, allowing high-earning clinicians to reduce their pension contributions.
However, NHS Providers said this isn’t enough to solve the problem, and that without an alternative solution, the issue will continue to cause delays and could compromise the quality of patient care.
The tapered annual allowance explained
Pension contributions can be made tax-free up to a certain limit every year, called the annual allowance.
This stands at £40,000 in 2019/20, but it’s restricted for people with a taxable adjusted income of more than £150,000.
For every £2 of income they have over £150,000, their annual allowance is reduced by £1 up to a maximum of £30,000.
That means someone with an income exceeding £210,000 will have an annual allowance of £10,000.
Making pension contributions above the annual allowance will result in a tax charge, which may come as a shock to people who aren’t aware of the rule.
Adjusted and threshold income
Finding out if the taper applies to you isn’t as straightforward as it sounds.
The tapered annual allowance only applies if your adjusted income is over £150,000 and your threshold income is over £110,000 in a particular tax year.
To work out either one of these figures, you’ll need to start with your net income. This is all of your taxable income, whether from earnings or elsewhere, minus any tax reliefs that apply.
You’ll also need to know how much you saved into your pension during the year you’re looking at.
Using that information, you can calculate your adjusted income, which includes all pension contributions, and your threshold income, which excludes them.
For more detail on this calculation, see HMRC’s guidance, or talk to us if you would like us to handle this on your behalf.
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Understanding how the tapered annual allowance could affect you is complicated, and it’s best to seek advice to avoid high tax bills.