Each tax year, there is a limit on the amount you can contribute to and/or accrue in a pension. This is the ‘Annual Allowance’. If you exceed the Annual Allowance, the excess is subject to an income tax charge at your highest rate of tax (20% for a basic rate taxpayer, 40% for a higher rate tax payer or 45% for an additional rate taxpayer).
Doctors and other high earners in the NHS, especially those in the NHS Pension Scheme, are amongst some of the most likely to be affected by the Annual Allowance. It could therefore pay to make sure you are familiar with the rules.
How much of the Annual Allowance is used up by your NHS Pension?
The NHS Pension Scheme will calculate the amount by which your NHS Pension has increased in value over the relevant time period. This ‘pension input amount’ is what counts towards your Annual Allowance. It is a complicated calculation but roughly speaking it compares the value of your accrued pension benefits (the income and tax-free cash lump sum you are set to receive in retirement) at the beginning and end of the pension input period. The closing figure is typically higher as you have gained an extra year’s service and can in some cases be considerably higher if you have received a salary increase or pay award.
What else counts towards the Annual Allowance?
Any contributions you have made to any other pension plan (such as a personal pension or SIPP), any contributions that anyone else has made to a pension held in your name on your behalf and accrual in any other work-based pension schemes will also count towards the Annual Allowance.
How much is the Annual Allowance?
The Annual Allowance is usually £40,000, but there are several variations as outlined below:
The pension input period for the NHS Pension Scheme has traditionally been from 1 April to 31 March the following year. This year, the Chancellor announced that all pension input periods should be aligned with the tax year from 6 April 2016 onwards. To bring this into effect, the year has been split in two: a pre-alignment period of 1 April 2015 – 8 July 2015 (the date of the Chancellor’s announcement) and a post-alignment period of 9 July 2015 – 5 April 2016. From then on the pension input period will run in line with the tax year (6 April to 5 April the following year).
Both the pre-alignment and post-alignment periods effectively have their own £40,000 allowance. After 5 April 2016, the NHS Pension Scheme will calculate your pension input amount for the whole year then divide it proportionately between the pre- and post-alignment periods.
If you contribute to or are a member of any other pension schemes you will need to contact them directly to check which allowance, and how much, you have used. Please contact us if you would like further help, information or advice.
If your pension contributions are usually within the Annual Allowance but will be higher in a given tax year, you can carry forward your unused allowance from the previous three tax years. Please contact us if you would like advice on this area.
From next tax year (starting 6 April 2016) the Annual Allowance of £40,000 will be reduced by £1 for every £2 that your ‘adjusted income’ exceeds £150,000. The maximum reduction is £30,000, meaning those with an adjusted income of £210,000 or more will be left with an Annual Allowance of £10,000.
Your adjusted income is your total income from all sources e.g. salary, rental income and investment income, plus the value of any pension contributions made by you and your employer.
However, there will be no reduction if your adjusted income is above £150,000 but your ‘threshold income’ is below £110,000. Your threshold income is your total income from all sources without the addition of pension contributions.
For further information and advice on this area please contact us.
On 6 April 2016 new rules were introduced that allow holders of money purchase pension plans (e.g. personal pensions, SIPPs and stakeholder pensions) to access as much of their pension savings as they like at any time once over the minimum pension age (currently 55). 25% of the pension can be paid out tax-free, with the remainder subject to income tax.
Those who have ‘flexibly accessed’ pension income under the new rules are then subject to a Money Purchase Annual Allowance of £10,000. This reduced allowance is designed to stop people from taking pension benefits then using these to fund further pension contributions.
The remaining part of the Annual Allowance is still available for accrual in defined benefit pensions, i.e. work pensions that will pay out a guaranteed income based on your salary and length of service like the NHS Pension Scheme.
Please contact us if you think this might affect you and you would like advice on this area.
What if you might exceed the Annual Allowance?
The best course of action will depend on your personal circumstances. We offer advice on this area so please get in touch on firstname.lastname@example.org or 0117 966 5699. In some cases, particularly for NHS Pension Scheme members, a charge may be unavoidable; however, we can help you minimise your tax bill and make sure that the situation is not exacerbated by any other decisions you are planning for your income, pensions and retirement planning.