NHS pensions made news this year, consultants and GPs blaming large tax bills, linked to pension statements, for making some work uneconomic. But why should high-earning power, coupled with pension provision, spell trouble - even for top-earners outside the NHS?
Two key allowances are at play: the annual allowance (AA) and tapered AA. The type of pension scheme also plays a part; the NHS uses a defined benefit arrangement.
The AA – usually £40,000 - is the total employer and employee contribution that can be put into a defined contribution pension scheme each year. For a defined benefit scheme, the AA is generally measured against how much the value of the accrued pension has risen over the year. Factor in the AA taper, introduced in 2016 to restrict relief for top-earners, and the position becomes very complicated indeed. The taper can reduce AA from £40,000 to £10,000, cutting it by £1 for every £2 of 'adjusted' income over £150,000. Adjusted income includes not only total income, but the value of employer pension contributions for the year. The taper does not apply if taxable income, after allowing for certain reliefs, is below £110,000.
For those in defined benefit schemes, benefit build up can be significant - and not immediately visible to the individual involved. Large pay increases and long pensionable service compound the issue. For those in defined contribution schemes, significant employer contributions may result in a tapered AA if total income, such as pay and dividends, exceeds £110,000.
How we can help
We are always happy to advise on pension issues and associated tax planning opportunities. We should also be delighted to discuss the government's undertaking to create 'full flexibility' over pension contributions and minimise AA problems for senior NHS clinicians, if this affects you.