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- Independent Advice
- NHS & State Pensions
- Retirement Planning
- Estate & Tax
- Risk & Protection
The Annual Allowance (AA) was introduced as a pension control on ‘A’ day (6 April 2006), when the Government sought to simplify pensions by introducing a single set of common rules that apply to all UK pension products.
For tax relief purposes, it is a limit set on the total amount of contributions that can be paid to defined contribution pension schemes each year; and the total amount of benefits that you can build up in defined benefit pension schemes each year.
Exceeding it will trigger a tax charge.
To avoid this charge, high earners should check before making a pension contribution.
NHS Consultants, GPs and Dentists receive a Pension Savings Statement each year from your relevant Public Pensions Agency, forexample the Scottish Public Pensions Agency. It is important to review this, as it shows the deemed contribution, reflecting how much your pension has grown in that year. This may be larger than you initially anticipate, as it includes employers’ contributions.
If your deemed contribution exceeds the AA – currently £40,000 – then you could be left with a significant tax bill to pay.
It may be possible to exceed this in a single taxyear, if you can carry forward an unused portion of AA from one or more of the preceding three tax years. This can allow you to make a larger contribution in a particular tax year, should your circumstances allow.
Tapered Annual Allowance
To complicate matters further, from 6 April 2016, individuals who have an ‘adjusted income’ greater than £150,000 in any given tax year will have their AA reduced (tapered) for that tax year. (Note, it is not possible to use salary exchange to reduce your income below £150,000, as employer contributions are included in the definition of ‘adjusted income’.)
If your income in a tax year falls below the ‘Threshold Income’ – currently £110,000 – then the Tapered Annual Allowance will not be applied, regardless of your ‘adjusted income’ for the same tax year.
If your Threshold Income is above £110,000, then the Tapered Annual Allowance will need to be tested. There is a cap of £30,000 set to the tapering, which means that the minimum tapered AA is £10,000.
Members of the NHS or University Pension Scheme do not have the scope to reduce funding levels to below their AA. Instead, they can choose to:
- Remain in the pension scheme and suffer the tax.
- Leave the NHS or University Pension Scheme and fund using a personal pension, up to the reduced AA, and then use your allowances for the new Individual Savings Accounts (NISA).
Critical to your decision is how much employer funding will be lost.
If you wish guidance on your options regarding the Tapered Annual Allowance please contact us.
Pensions are a long-term investment. You may get back less than you put in. Pensions can be and are subject to tax and regulatory change therefore the tax treatment of pension benefits can and may change in the future.