By Ellen Curnow, Accountant at Hive Business
If you don’t deal with charges and taxes on a regular basis, the NHS pension tapering won’t be a simple concept to get your head around. Those who are affected by it are healthcare professionals, not accountants! It can, therefore, be challenging for dentists (or doctors) to make decisions which will affect their charge based on information that they don’t understand. So, here is a run-down of the basics.
There are two figures that you may need to work out; threshold income, and adjusted income, and here is how they are both calculated:
| Pensionable pay | |
| + Non-pensionable pay | |
| + Other taxable income | |
| – Pension contributions | Threshold income |
| – Other tax-deductible reliefs | + Pension input amount |
| = Threshold income | = Adjusted income |
If your threshold income is below £110k then you don’t need to worry. Your annual pension contribution allowance will be the standard £40k.
However, if your threshold income exceeds £110k, you may be subject to a tapered annual allowance and you will then need to check your adjusted income.
If your adjusted income exceeds £150k, your annual allowance for pension contributions of £40k will be tapered off. It will be reduced by £1 for every £2 that your adjusted income exceeds £150k (to a minimum of £10k per year).
If you have made pension contributions or otherwise experienced growth in your pension pot that exceeds £40k or your tapered allowance amount, you may have to pay an annual allowance charge on the excess contributions. This excess figure is known as your chargeable amount and will then be charged at your highest tax rate for that tax year. If you’re affected by this, that’s almost certainly 45%.
As an extra layer of complication, you can carry forward any unused annual allowance from the three previous tax years and add it to your tapered annual allowance to reduce your chargeable amount.
As a basic example, someone with a threshold income of £120k, an adjusted income of £180k, a pension input amount of £60k, and brought forward unused allowances of £8k will have the following additional tax to pay;
| Standard annual allowance | £40,000 |
| Taper ((£180k-£150k)/2) | -£15,000 |
| Brought forward unused allowances | £8,000 |
| Tapered Annual Allowance | £33,000 |
| Pension input amount | -£60,000 |
| Chargeable amount | £27,000 |
| Charge (assuming 45% tax rate) | £12,150 |
Essentially, the government have decided they don’t like wealthy people saving for the future any more. Care should be taken not to make excess contributions where income exceeds these limits. Speak to us about alternative ways of using company funds or planning for the future.
If you have any questions about the pension tapering, or if you need help working out your charge, get in touch.
