Will you be caught out by the ‘taper’?
Dr Benjamin Holdsworth of Cavendish Medical, on the steps you need to take
More doctors are triggering substantial tax bills because of harsh pension savings regulations known as the ‘tapered annual allowance’. HMRC has revealed that the average tax bill individuals faced for breaching this yearly pension contribution limit 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 ‘taper’ first applied.
It is important to check where you stand:
Step 1 – Check previous years. Have the payroll figures been submitted correctly in your previous calculations? Have you had any backdated pay? We often see pay slips which contain small errors leading to big differences in your pay and subsequent pension inputs.
Step 2 – Calculate your approximate threshold income for the current/forthcoming year. You should include your NHS income (and ad-hoc NHS work) as well as private practice earnings, dividends from investments and buy-to-let property income.
If your threshold income is likely to be more than £110,000, you will need to check your ‘adjusted income’ to ascertain whether the tapered allowance will apply. ‘Adjusted income’ is your threshold income plus your pension input for the year.
Step 3 – Establish if your private practice is structured efficiently – it may be possible to reduce your threshold income by amending the structure. If you have a company, have you planned your level of dividend?
Step 4 – Assess your likely NHS pension input for the year. Calculating pension contributions for a defined-benefit scheme such as the NHS is difficult as it is not based on the amount that you and your employer have paid into your NHS pension but on the deemed ‘growth’ in the year.
Step 5 – Estimate your approximate tax bill and how you intend to pay it. There are multiple options for paying an annual allowance tax charge – via self-assessment, through the NHS Scheme Pays option or utilising your personal pension pot. There can be tax advantages in using Scheme Pays but you should be mindful that the interest payments can escalate quickly and the future inflation rate is unknown. Using a personal pension to pay the tax charge is typically the best option of the three, however it is essential you receive the right advice in this area.
Dr Benjamin Holdsworth is director of Cavendish Medical – specialist financial planners for medical professionals in the NHS or private practice. For a second opinion on your finances, please contact us on 020 7636 7006. www.cavendishmedical.com
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.