Pensions are extremely tax advantageous and as such the amount that can be saved in a pension each year is limited. The limit is called the Annual Allowance and pension input that exceeds the allowance is subject to a tax charge. Pension tax relief is seen by some to benefit high earners disproportionately (as they can afford larger contributions and receive tax relief at the highest rate) so to limit the amount of relief paid to wealthy individuals the Annual Allowance is reduced for high earners. The tax charge on any Annual Allowance excess effectively undoes the benefit of the tax relief.
High earning doctors earning £110,000+ are potentially caught by these rules. The Annual Allowance is reduced for individuals with a ‘threshold income’ of £110,000 or more and an ‘adjusted income’ of £150,000 or more. This article explains these two measures of income and how the Tapered Annual Allowance works for those affected.
It is worth noting that NHS Pension members do not currently have the option to stop or reduce their pension input while remaining a member of the scheme. Doctors who are subject to a Tapered Annual Allowance will therefore commonly find they have an Annual Allowance excess.
‘Threshold income’ is the total of all sources of taxable income (e.g. all NHS and private income, rental income, savings income and dividends from stocks and shares) minus the value of member and personal pension contributions and other tax deductible reliefs such as gift aid.
‘Adjusted income’ is effectively the above plus the value of any pension saving in that year. For NHS Pension members this is the pension input amount (request a pension savings statement for confirmation of this figure) plus any contributions made to other pension schemes.
Where the threshold income is over £110,000 and adjusted income is over £150,000, the Annual Allowance is tapered.
In a given tax year Dr Jones receives taxable NHS pay of £131,343 and £10,000 investment income. Her pension contributions are £19,045 and she makes charitable donations of £5,000.
Her threshold income is:
Pensionable pay of £131,343 + other taxable income of £10,000 - pension contributions of £19,045 – other tax deductible reliefs of £5,000 = £117,298
As this is over £110,000 she must now check whether her adjusted income is over £150,000 to establish whether the Tapered Annual Allowance applies.
Dr Jones’s pension savings statement for the year confirms a pension input amount of £62,089.34. Her adjusted income is therefore:
Threshold income of £117,298 + pension input amount of £62,089.34 = £179,387.34
As this is over £150,000 the Tapered Annual Allowance will apply.
The standard Annual Allowance of £40,000 is reduced by £1 for every £2 that the adjusted income exceeds £150,000. This is subject to a minimum of £10,000 for those with an adjusted income of £210,000+.
Continuing from the above example, Dr Jones’s adjusted income is £29,387.34 over the £150,000 limit. Her Annual Allowance is reduced by £29,387.34 ÷ 2, i.e. £14,693.67, giving her a Tapered Annual Allowance of £25,306.33.
If the pension input amount is greater than the Tapered Annual Allowance, there is an Annual Allowance excess.
In our example we can see Dr Jones’s pension input amount of £62,089.34 has exceeded her Tapered Annual Allowance of £25,306.33 by £36,783.01.
Source of example: www.nhsbsa.nhs.uk.
For information on what happens when you exceed the Annual Allowance please check back for our forthcoming article ‘What happens if you exceed the Annual Allowance?’