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Pension poser for doctors completing tax returns

19 January 2018

Doctors completing tax returns by the end of this month need to check whether they face an annual allowance tax charge on their NHS Pension Scheme membership.

The new year brings a familiar challenge – completing your self-assessment tax return by 31 January to avoid a late filing penalty of £100 and interest charges on unpaid tax. While much of the return should be straightforward, doctors potentially affected by the annual allowance tax charge on their pension scheme membership need to make it a priority to check their exposure; research published last year by a leading insurer found there had been a 79% increase in the number of people caught out by the charge.

The annual allowance for tax-relieved pension contributions currently ranges between £10,000 and £40,000 depending on your total taxable income, and in defined benefits schemes such as the NHS Pension Scheme calculating how much allowance you’ve used is not straightforward. Where benefits are guaranteed in retirement, in schemes such as this, the annual allowance is measured not by the amount you physically pay into the scheme but by the increase in your benefits over the year – you will need this information from your scheme administrator to check your position.

If you have private pension arrangements, it is simply the gross contributions into your pension scheme which are measured. If you have both a defined benefits scheme and a private pension arrangement these figures need to be added together.

Doctors who exceed the annual allowance may have to repay the tax relief on any pension contributions above the allowance. They may also face an additional tax charge on the excess pension growth.

Am I affected by the annual allowance charge?

HMRC is very clear that it’s your responsibility to assess whether you are liable. While the NHS Pension Scheme issues statements to doctors and other members it thinks have exceeded the annual allowance, you can’t depend on this guidance either way. The rules are complicated and pension scheme administrators do not have access to all your financial records.

As a result, the fact you haven’t received a statement doesn’t mean you aren’t liable; equally, if you have received a statement, don’t panic. In one recent case reviewed by Chase de Vere, a doctor was told to pay more than £160,000 – a full review of their finances found there was nothing to pay.

It’s therefore crucial to review your position yourself if there is any chance you may have exceeded the annual allowance.

What is my annual allowance?

Doctors with higher levels of income get a lower “tapered annual allowance”. This affects doctors who had both an adjusted income of more than £150,000 in 2016-17 – taxable income from all sources plus the value of your pension growth over the year less your contributions – and a threshold income of more than £110,000 – essentially your income excluding your pension contributions. For each £2 over the adjusted income you earn, your annual allowance reduces by £1, until you reach an income of £210,000; anyone at this level or above gets an annual allowance of only £10,000.

More positively, many doctors will be able to benefit from the carry forward rules. These allow you to bring forward unused annual allowance from each of the past three tax years – you’ll need to check what you were entitled to in each case – and add it to this year’s cap. So even if you’re over the annual allowance for 2016-17, unused allowance from 2013-14, 2014-15 and 2015-16 may help you reduce or avoid any charges.

What if I have a charge to pay?

You only need to declare your pension growth on your 2016-17 tax return if it exceeds your annual allowance, whether full or tapered, and you can’t cover the excess using the carry forward rules. If so, HMRC’s online filing service includes a calculator that will help you check what you owe. If the bill is less than £2,000 you must pay it as part of your normal tax bill by 31 January.

If the charge is more than £2,000, you have the option of asking the NHS Pension Scheme to pay it out of your benefits under the “Scheme Pays” arrangement, though this is only available for any excess over the standard annual allowance of £40,000. To pay in this way, you must ask the NHS Pension Scheme to arrange this payment before 31 July in the year following the relevant tax year – so by 31 July this year for 2016-17.

Where do I get more help?

The 31 January deadline is a strict one, so even if you don’t have all the information needed to calculate your annual allowance charge, you must make careful estimates on your tax return. These can be adjusted later once you have all the detail required – check with your pension scheme administrator as soon as possible.

In practice, these rules are complicated and taking independent financial advice makes sense. A specialist adviser will to help you understand exactly how the rules apply to your individual circumstances, as well as what you may be able to do to mitigate annual allowance problems.We have helped more than twelve thousand doctors to plan for a successful future.

We have helped more than twelve thousand doctors to plan for a successful future.

At Chase de Vere, we take the time to understand you and your goals, then our specialist advisers will help you to create a plan to achieve them.

To speak with a member of our team call us on 0345 609 2008 or complete our contact form.