Tapered Annual Allowance: What Doctors Need to Know

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. 

Calculating ‘threshold income’ and ‘adjusted income’

‘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. 

Example: 

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.

Calculating the Tapered Annual Allowance

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+. 

Example:

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. 

Calculating the Annual Allowance excess

If the pension input amount is greater than the Tapered Annual Allowance, there is an Annual Allowance excess.

Example:

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?’  

More News
Can doctors trust the rising market? Monday, July 23, 2018
Quote Mark
  • "We have been very impressed with the personal service, attention to detail and comprehensive evaluation of our financial circumstances. We would certainly appreciate ongoing help and support from Richard over the future." Jason Kendall (Consultant in Accident and Emergency), Southmead Hospital
  • "Richard provides a very convenient and personal service. Richard has good knowledge and has the ability to go through reasoning for any recommendations." Tim Mitchell (GP), Montpelier Health Centre
  • "Richard provides an excellent service, prompt and flexible. Although the level of technical knowledge is impressive, answers to our questions are presented in a straightforward manner, without overwhelming us with information." Mary Gainsborough (Consultant in Paediatrics), Southmead Hospital
  • "Richard gives me an excellent personal service in my own home. His advice and explanations have been excellent. Richard also has excellent technical knowledge – who wouldn’t be happy?" Charles Record (GP), Frome Valley Medical Centre
  • "Richard provides an excellent, personal service. He responds very quickly and attentively to queries and very much keeps me up to date with important matters that affect me - such as the latest changes to pensions, investments and taxation. Recommendations are delivered in a timely, effective manner - usually face to face in my own home." Professor Gianni Angelini (Head of Cardiothoracic Surgery), BRI
  • "It is very convenient for me to be seen at home and Richard is very flexible with timings - especially when unexpected things crop up at the hospital. Meetings are friendly and relaxed with my long-term best interests very much at the heart of discussions." Professor Gianni Angelini (Head of Cardiothoracic Surgery), BRI
  • "We have found it far more reassuring having a local adviser rather than a national firm. We have found the service excellent and Richard answers all the questions we want answering. Richard's technical knowledge is excellent, he has detailed knowledge of pensions." Paul Male and Helen Lewis (GPs), Thornbury Health Centre
  • "The personal touch counts for a lot and the willingness to visit us at home is much appreciated. Richard provides an excellent, friendly, accessible service, not encumbered by jargon or salesmanship." Professor Peter Mathieson (Honorary Professor of Medicine), University of Bristol
  • "I can recommend Richard as providing measured, balanced independent financial advice. He listens very carefully and tailors advice appropriately in a knowledge-based manner. He is very accessible and gives his clients time and clarity in order to make the most sensible decisions for themselves based on the available facts." Andrew Medford (Consultant in Respiratory Medicine), Southmead Hospital
  • "Richard now knows me and understands my financial position. I have complete trust in his advice. The level of service I have experienced is second to none. We have received regular reviews in our own home, speedy and thorough advice to any queries." John Rees (General Practitioner, Specialist in Urology ), Blackwell and Nailsea Medical Group
  • "The advice I have received has dramatically altered my personal protection policies for the better and reduced my personal tax liability." John Rees (General Practitioner, Specialist in Urology ), Blackwell and Nailsea Medical Group
  • "I appreciate Richard's local knowledge and the fact that he is in contact with a lot of local general practitioners which is useful for networking. He is also very knowledgeable about the different pension schemes and their pros and cons." Fiona Hayes (General Practitioner) Bristol University Student Services
  • "I have enjoyed the process of dealing with a local advisor and it has not felt like a box ticking exercise. The service has been excellent. The great flexibility to come to my home at a time suitable to my working day has set this company apart from others I have dealt with in the past. The technical knowledge provided has been expertly tailored to my requirements and financial situation. The manner in which it has been delivered has also been first rate. " Beth Harrison (General Practitioner) Montpellier Health Centre
  • "We have regular meetings with the same adviser who knows our profile and keeps our requirements in mind with the plans he makes. The reviews are simple to organise and are always at a convenient time and location." Mike Bould (Orthopaedic Surgeon) Western General Hospital
  • "The service I have received from Wealth West is excellent! they are more personable and accessible than large firms and are not pushy at all. They also have a very good breadth and depth of knowledge." Billy and Annie Headdon (Anaesthetics and Intensive Care Trainee, General Practitioner) Montpelier Health Centre
  • "My experience of the service has been excellent. I have been able to ask many questions and have received excellent advice on my financial situation. The technical knowledge of Wealth West Medical is excellent. Anyone who can help my investments grow in the current environment clearly knows what they are doing. I would highly recommend Richard and Wealth West Medical." Linda Buczek (General Practice Manager) Bishopston Medical Practice
  • "The technical knowledge of Wealth West Medical is very good. Richard keeps up to date with the changes to the NHS pension scheme and new legislation." Melanie Lockett (Consultant) Southmead Hospital
  • "Wealth West Medical offers a friendly, helpful and efficient service. Richard keeps in touch at regular intervals and has a very good knowledge of pensions and investments." Rachel Brown (General Practitioner) Montpelier Health Centre
  • "Richard comes to my house for meetings and it is nice to see a familiar face. He remembers my details, and advises over the long term. Richard has a detailed understanding of my particular pension plan and has explained this very clearly to me. He has also helped me to manage tax payments for annual allowance and pension protection." Hugh Herzig (Consultant Psychiatrist) Southmead Hospital
  • .