More and more doctors are triggering substantial tax bills because of harsh new pension savings regulations.
The annual restriction on the amount you can contribute to your pension free-of-tax is known as the ‘annual allowance’. New rules decrease the standard annual allowance of £40,000 to as low as £10,000 per year for doctors with a ‘threshold income’ of more than £110,000 – this is known as a ‘tapered annual allowance’. Excess pensions savings above the allowance will generate a tax bill charged at your marginal rate of income tax.
Earlier this year, HMRC revealed that the average tax bill individuals faced for breaching yearly pension contribution limits in 2016/2017 was £29,635, with some obviously paying much more. In total, a record tax haul of £517m was added to Treasury accounts from pension tax breaches that year – when the new ‘tapered’ limits were first applied.
Many of those getting caught out are doctors with decades of NHS service because they are tied into making contributions to the pension scheme.
Pensions’ taxation could also be responsible for record numbers of NHS workers quitting the pension scheme. Over the past three years, a quarter of a million NHS workers chose to opt out of the scheme with 102,755 opting out in 2016 alone (again, when the tapered allowance first applied), a 78 per cent increase from the previous year.
The age group with the highest number of NHS pension scheme leavers were 46-55 year olds, with a 94 per cent increase in 2016.
We have seen several clients who have discussed early retirement, reducing their hours or leaving the pension scheme because of tax concerns. However, opting out of the NHS scheme is not a decision which should be taken without detailed financial modelling which can pinpoint whether this is the best move for you.
The scheme provides a high level of security and substantial benefits such as death in service and ill-health support which cannot be provided through private pensions.
Please do contact us should you wish to discuss your options on 020 7252 5765.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.