Everything you need to know about the NHS Annual Allowance
How will you be affected by the Annual Allowance?
As an NHS doctor, you are likely to be impacted by the yearly pensions savings limit known as the Annual Allowance. This governs the amount of tax-free savings you can accrue in your pension before triggering substantial tax charges.
The standard NHS Annual Allowance is currently £40,000 however, higher earners are subject to the Tapered Annual Allowance. This reduces the standard Allowance on a sliding scale, dependent on your income.
How has the Annual Allowance changed?
In 2020, the limits of the Tapered Annual Allowance were changed – under the new rules, anyone with a ‘threshold’ income of £200,000 or more plus an ‘adjusted’ income of £240,000 or more is subject to the reduced Annual Allowance which can be as low as £10,000.
These figures may seem high but your threshold income includes earnings from all sources including your NHS salary, private practice work, property rental or investment returns. Your adjusted income also includes your pensions growth for the year.
As you know, this pension growth can be substantial for many NHS career doctors with decades of employment behind them.
How low can the NHS Annual Allowance be?
If you earn over £312,000 from all sources, you will face a Tapered Annual Allowance of just £4,000. Your NHS pension growth will easily exceed this figure, before factoring in any private pension contributions.
How can you pay the tax charge?
If you breach the NHS Annual Allowance, you will be charged tax on any excess pension savings at your marginal rate of income tax. You can ask the NHS to pay the charge for you using Scheme Pays in exchange for reduced benefits in retirement but you must apply before the deadline each year.
Medical Family Finance can also help you to decide the most tax-efficient way of paying any tax charge.
How can Medical Family Finance help with the NHS Annual Allowance?
Many NHS doctors wrongly believe they do not have an Annual Allowance charge to pay. This is because the NHS Pensions Agency is only duty bound to notify you of an impending Annual Allowance issue if you breach the standard rate – not if you breach the Tapered Annual Allowance.
The NHS Annual Allowance calculations are notoriously difficult. Plus, the NHS Pensions Agency’s annual statements are often delayed or the computer-generated figures can be wrong – making your Annual Allowance position even harder to establish.
Medical Family Finance can help you to ensure your figures are correct (including your payslips and pension) and that you have used all available allowances (such as Carry Forward) to minimise your tax liabilities.
Watch our NHS Annual Allowance webinar for free
This session was hosted by chartered financial planner Joseph Awaritefe and covers the following key topics:
- Annual Allowance rules up until the end of 19/20 tax year
- Paying tax charges including Scheme Pays options
- Claiming government compensation for tax charges in the 19/20 tax year
- Impact of new Annual Allowance rules from the 2020/21 tax year
- How the McCloud Judgement may affect your Annual Allowance figures