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Are you walking blindly into a tax trap?

Daryl Stafford writes: The television adverts might be promising pre-Christmas delivery but there is no such festive joy from the NHS Pensions Agency.

Thousands of doctors could face harsh tax penalties on their annual pension growth because they have not yet received annual statements from NHS Pensions which is now experiencing processing delays of up to 16 weeks.

In autumn every year, the NHS Pensions Agency sends out letters detailing doctors’ annual pension input for the preceding tax year. They will only do this if the doctor concerned has had an ‘annual allowance’ input of more than £40,000.

The surprise is that there is a new tapered annual allowance for those doctors with adjusted earnings (ie all their NHS and private earnings plus interest from savings plus the actual growth in the pension itself) of over £150,000.  This reduces the permitted input down from £40,000 to as little as £10,000 per year. This will affect many mid-career and especially high achieving doctors.

If your pension ‘grows’ by more than £10,000 in a year, you may still exceed the annual allowance limit but may not be aware as only those saving over £40,000 per year are required to receive annual allowance statements from the NHS without asking for them.

Anyone breaching the annual allowance limit – at whatever level is relevant to them – will pay tax on the excess at their highest marginal rate of income tax so 40 or even 45 per cent.

Many doctors are blissfully unaware or simply too busy, particularly at this time of year, to assess their own financial situation but the recent news that the tax man has claimed at least an extra £53 million from savers breaching the new tapered annual allowance in 2016/2017 is a sobering thought.

Remember also that it is your total income which will be tested to check if a reduced annual allowance applies – including any dividends, rental income, bonuses, benefits in kind and the actual growth in your pension itself (not just your contributions) – a highly complex calculation.

To add to the confusion we have also come across many letters from the Pensions Agency with incorrect figures which will impact the amount of tax you need to pay. This is especially true if you’ve had an award or increment.

What should you do?

If you think you may be affected you should request your own annual allowance pensions’ statement from the NHS Pensions Agency as soon as possible and seek help without delay from a financial adviser with NHS pensions experience.

Acting sooner rather than later could be the wisest financial decision you make.