Changes to Pensions Allowances

Healthcare professionals, in particular doctors and dentists, are facing the possibility of a  further tax charge as a result of the reduction to the annual pensions allowance.

With effect from 6 April 2016, the £40,000 annual allowance is reduced for those with ‘adjusted income’ in excess of £150,000, with the result that many more may end up paying the pensions savings tax charge.  The £40,000 allowance is reduced by £1 for every £2 that ‘adjusted income’ exceeds £150,000, until it has reduced down to a minimum of £10,000, ie  where ‘adjusted income’ is £210,000 or more.

However, the new rules will generally not apply to those where total income less pension relief claimed, the so-called “threshold income”, is below £110,000.

The ability to carry forward unused annual allowance from the previous three tax years will be retained as previously.

Members of the NHS scheme will be particularly affected as they have less ability to alter the amount of their pensions savings than, say, those who pay into personal pension schemes.

It is also likely to result in significant practical difficulties, and we do not yet have details about how this will be administered in practice  We will provide further details as they become available.

The pensions annual allowance is the amount that can be saved into pensions in a tax year without incurring the pensions savings tax charge.  This charge is an additional tax liability, paid with the annual tax bill, which effectively claws back some of the higher rate tax relief on pension savings.

Where the charge exceeds £2,000, a “scheme pays” election can be made by the first anniversary of the 31 July following the end of the tax year in which the charge is incurred.  The NHS pension scheme will then pay the tax charge but the NHS benefits will be permanently reduced so professional advice should always be sought before making the election.

‘Adjusted income’ for these purposes is defined as ‘net income’ plus the value of any pensions savings.

‘Net income’ is defined in the usual way as all taxable income less the reliefs you are entitled to, including gift aid and pensions contributions deducted from earnings.

Pensions savings includes the value of both your own and your employers’ pension contributions. For the NHS scheme, the employer contributions will be the pension input amount, calculated in the same way as previously, less the member contributions.

In summary therefore, ‘adjusted income’ will broadly be all taxable income, less the superannuation paid, plus the annual growth in the pension, as shown by the Pensions Savings Statement.

The NHS Pension Scheme must provide a Pensions Savings Statement to members who exceed the annual allowance by 6 October following the end of the tax year.  Now that the level of the annual allowance is dependent on other, non-NHS, income sources this will become more difficult to administer and we do not yet have details of how this will work in practice.

In the meantime, if you have any concerns, or wish to clarify whether you are likely to be affected by this change, please do not hesitate to contact a member of our Healthcare team.