Pensions Annual Allowance
While Rishi Sunak’s recent Budget may not have made any further changes to pensions annual allowance, it is important to remember that there were significant changes from the 2020/21 tax year.
Prior to 2020/21
For the 2019/20 tax year the annual allowance was £40,000 with threshold income at £110,000 and adjusted income at £150,000. If a GPs threshold income was below £110,000 then the full £40,000 annual allowance was available. Threshold income is broadly an individual’s taxable income for the tax year less the gross amount of any relief at source pension contributions.
If an individual’s threshold income exceeded the £110,000 level then you are required to calculate their adjusted income by adding the pension growth in the year from the NHS plus any other private pension contributions to the threshold income. If the resulting adjusted income figure exceeded £150,000 then the £40,000 annual allowance was reduced. The reduction is £1 for every £2 that the adjusted income exceeded £150,000, but the annual allowance could not be reduced below £10,000.
Remember that for 2019/20 there was an exceptional arrangement whereby NHS pension scheme members were able to have any pensions annual allowance tax charge arising on their NHS pension (excluding a charge from added years contracts and University superannuation schemes) met by the NHS Pension Scheme through Scheme Pays. While a member can apply for Scheme Pays in any tax year, the difference for 2019/20 was that on retirement NHS England will ensure that the individual’s pension is made good – a promise underwritten by the Government. Therefore, most GPs will have had a reprieve from pensions annual allowance tax charges on their NHS pension for 2019/20 – but only that year.
What changed from 2020/21?
Last March, Rishi Sunak announced that from 2020/21 onwards the threshold income level would increase from £110,000 to £200,000 and the adjusted income level from £150,000 to £240,000. Helpfully this is likely to have taken the majority of GPs out of pensions annual allowance tapering and they will have the full annual allowance of £40,000 available to them.
However, this doesn’t mean that they will not suffer a pensions annual allowance tax charge: there would still be a tax charge if their pension growth and private pension contributions exceeded £40,000 (and they didn’t have sufficient brought forward allowances to offset this excess). Therefore, careful checking is still required.
The sting in the tail is that very high earning GPs can now have their pensions annual allowance reduced down as far as £4,000 (rather than £10,000) so they are likely to see higher pensions annual allowance tax charges than before.
Pensions Lifetime Allowance
Within the March 2021 Budget, the Chancellor decided to freeze the pensions lifetime allowance at £1,073,100 for all tax years to 2025/26 rather than allowing inflation linked annual increases. Therefore, more taxpayers are likely to exceed this allowance and those that do will pay higher tax charges on retirement. Carefully planning the way you decide to take your NHS benefits at retirement can help mitigate lifetime allowance charges so seek advice from your financial planning adviser.
Make sure you obtain a Pensions Annual Allowance statement and Pensions Total Rewards statement each year and send these to you Accountants so they can help you keep on top of these charges. Next month we will look at the impact of the Mcleod judgement including what this means for those doing opt in and opt outs.
For help and advice please get in touch with your usual BDO contact.
Subscribe to receive the latest BDO News and Insights
Please fill out the following form to access the download.