Doctors – Plan Ahead for the Tax Year End

Amongst the tax rule changes due to come into effect on 6 April 2016 (the start of the new tax year), there are three particular points for doctors to be aware of and plan ahead for:

  1. A reduction in the Annual Allowance for pension contributions/accrual for high earners
  2. A reduction in the Lifetime Allowance for pensions from £1.25 million to £1 million
  3. A potential reduction in pension tax relief for higher and additional rate taxpayers

Reduction in the Annual Allowance for high earners

The standard Annual Allowance is £40,000, but from 6 April 2016 will be reduced for high earners by £1 for every £2 of income over £150,000, down to a minimum of £10,000 for those with a total income of £210,000+.  Contributions or accrual in excess of the allowance are taxed at your marginal rate of income tax.

The value of your annual accrual in the NHS Pension Scheme is calculated by the scheme.  The calculation is complicated but in essence it measures the pension at the end of the year against the value at the start of the year, plus inflation.  The main events that may create an Annual Allowance tax charge within the NHS Pension Scheme are:

  • Rises in pensionable pay, through promotion or recruitment (from another NHS provider); or
  • Through a pensionable award such as a Clinical Excellence Award; or
  • Pensionable bonus combined with further pension accrual.

There are a number of choices available if you are likely to breach your Annual Allowance.  Please contact us for further information.  It is very important that you understand your options before making any decision that will potentially affect both your pension and/or your employment.

Reduction in the Lifetime Allowance

Pension benefits in excess of the Lifetime Allowance - £1.25 million, reducing to £1 million on 6 April 2016 – are subject to a tax charge of 55% if taken as a lump sum or 25% (on top of your usual income tax) if taken as income.

For defined benefit pensions such as the NHS Pension, the value for Lifetime Allowance purposes is 20 x the pension plus the value of the pension commencement lump sum.  If you have no other pension savings, pension amounts of £43,479+ from the 1995 NHS Pension Scheme or £50,000+ from the 2015 NHS Pension Scheme are enough to create a tax charge when set against a £1 million Lifetime Allowance.

If you have additional pension saving through AVCs, Added Pension or other pension arrangements outside of the NHS, the value of all of these must also be considered when testing against the Lifetime Allowance.

Again, there are a number of options available to protect against or minimise your exposure to a Lifetime Allowance charge.  Please contact us to find out more.

Potential reduction in pension tax relief

When the Chancellor makes his Budget announcement on 16 March 2016, this will include the outcome of a green paper on pension tax relief.  It is widely expected, although not known, that pension tax relief may no longer be as generous for higher and additional rate taxpayers as a result of this review.  Any change could come into effect immediately so it could be worthwhile reviewing your pension plans before this date if you might be affected.

To further discuss any of these changes please contact us as soon as possible.  The sooner we can start your planning, the more options you may have to avoid tax charges.  Please call Richard Higgs on 0117 966 5699 or email richard.higgs@wealthwestmedical.co.uk.

 

 

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