One of the many benefits offered by the MDU is a dedicated course on setting up in private practice, giving advice and information to consultants preparing to take the next step in their career.
Vanessa Sanders from Stanbridge Accountants presents the section of the course covering tax and pensions. Here she explains some of the changes to tax relief available on doctors' pensions taking effect from January 2018, and outlines some of the options available.
Doctors are about to feel the hard hit of the restrictions on tax relief on pension contributions and pot growth. A large proportion will experience a tax clawback repeating across the next few years, which could increase their tax bill by around £13,500 a year, with some facing potentially much larger liabilities.
The maximum level of contributions which attract tax relief is currently £40,000 for a pension input period (PIP). This is called the annual allowance. This is a single limit applied across all pension schemes including the NHS, added years, free-standing additional voluntary contributions and private provision.
For 2017, this annual allowance has been reduced significantly for those with 'adjusted income' in excess of £150,000. Many doctors do not realise that the calculation of the adjusted income basically includes income from all sources subject to tax, less their own actual cash pension contribution, plus the growth on their pension pot during the year as adjusted for inflation.
This is because the NHS schemes are defined-benefit schemes. These guarantee a specified level of pension at retirement that is based on salary, not on performance of the actual contributions made.
The growth on the pension pot for the annual allowance is tested by the change in value, after adjustment for the consumer prices index (CPI) at the end of the PIP - now aligned with the tax year - against the value at the start of the year. This value is then multiplied by 16 and any automatic lump sum is added, according to the scheme.
How might doctors' pensions be affected?
The problem many doctors face is that they are invested in more than one scheme, and this single annual allowance limit is applied across all schemes. From April 2016, this annual allowance of £40,000 was tapered by £1 for every £2 exceeding adjusted income of £150,000, subject to a maximum reduction of £30,000. So those enjoying an adjusted income in excess of £210,000 will receive tax relief on only £10,000 of contributions.
The annual allowance is not the maximum amount by which your pension savings can grow; growth depends upon salary levels and can be greater than £40,000, particularly if you receive an increase to pensionable pay during the year.
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Many doctors believe that they will not be affected, as £40,000 growth seems a large amount. But this can be breached easily, particularly if you are awarded a pay increase for any item of salary which is pensionable. An increase as little as £5,000 can result in growth of £40,000.
What are the options?
The NHS is sending out statements currently which detail pension growth only if it exceeds £40,000. However, all doctors need to request this information, as you may be affected by the size of your adjusted income or by having unused relief which can be carried forward.
It is essential to pass these growth statements on to your tax advisor, as tax relief claw-back is notified through self-assessment.
Each doctor will only know if the limits have been exceeded once their overall tax position for the year is quantified and the growth considered for calculating the adjusted income.
There are several options available, ranging from simply paying the tax and carrying on as before, opting out of the pension scheme, reducing your added years' contributions, or ceasing membership of the pension scheme.
Added to this is an anti-avoidance rule restricting action taken to manipulate total taxable income which results in the avoidance of the claw-back.
What action you take will depend on your pension needs, but this a very complex area and requires advice from both independent financial advisors and your accountant to check you understand the effect any action may have on your pension in addition to your tax position.