Doctors with income over £150,000 will have an Annual Allowance for pension contributions of as little as £10,000 from 2016/17. This allowance is to cover all pension accrual, including the NHS Pension Scheme. Contributions in excess of the Annual Allowance face a tax charge at the same rate as your highest rate of income tax, so typically 45% for the highest earners.
An Annual Allowance charge makes personal pension contributions unattractive. Those wishing to make tax-efficient long term savings might instead consider pension savings for a spouse/partner, children or grandchildren, ISAs, Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS).
Pension savings for a spouse/partner, children or grandchildren
All UK residents are entitled to basic rate (20%) tax relief on gross contributions of £3,600 a year or 100% of earnings if higher. If your spouse or partner is not maximising their contributions you could gift money to them to enable them to do so. Transfers of assets between married couples and civil partners are free from Capital Gains Tax and Inheritance Tax. Note, however, that this gift is irrevocable and you will also need to stay within your spouse/partner’s Annual Allowance.
If the long term aim is to pass your residual pension fund to future generations, it is possible to contribute directly to pensions in their names. While gifts to children and grandchildren are potentially subject to Inheritance Tax, you could make use of exemptions such as the ‘gifts from regular income’ exemption if the intention is to save regularly on their behalf.
ISAs are a first port of call for tax-efficient saving outside of a pension. The tax treatment of investments within an ISA is akin to that of pensions and unlike pensions there is no tax on withdrawal, although there is also no tax relief on contributions. The ISA allowance this tax year is £15,240 and next tax year is £20,000 so a couple can save £70,480 in ISAs in the next twelve months. In addition Junior ISAs, or Child Trust Funds for some older children, allow you to save up to £4,080 a year tax-free for children. Note that the child gains access to the money at age 18 and from that point will be able to spend it as they wish.
VCTs and EIS
Doctors looking to make significant tax-efficient investments in excess of the ISA and pension allowances might consider VCTs and EIS. These are government schemes to incentivise individuals to invest in small companies. The tax benefits offered as inducement reflect the higher risk nature of these investments and also their illiquidity. You must be willing to lock your money in for at least the minimum term to retain the tax relief and even after this it may not be possible to realise your investment at your convenience as you may have to wait until the VCT/EIS sells some or all of its underlying holdings. They should only be considered by experienced, high net worth investors. For those for whom they are appropriate, they offer:
Please note the value of tax reliefs and allowances depends on your personal circumstances. Tax rules are subject to change by the government. Doctors considering VCT and EIS investments should typically seek financial advice.
If you would like to discuss the above in relation to your personal financial planning please contact Richard Higgs , Chartered Financial Planner, on 0117 966 5699 or firstname.lastname@example.org.