Posted: April 4, 2020
Posted: 04 April 2020
You may have heard from the budget on 11th March that the government has decided to increase the annual allowance “threshold income” by £90,000 to £200,000 and that the “adjusted income” calculation has been similarly increased to £240,000. These will take effect in the 2020/21 tax year.
What does this mean?
This is all related to the tapering of the £40,000 annual allowance. The annual allowance is how much:
- you can contribute to a defined contribution scheme or,
- your defined benefit pension fund value can grow in the tax year,
before incurring a tax charge.
From April 2017, anyone with a Threshold Income exceeding £110,000 and Adjusted Income exceeding £150,000 in the tax year will have had their £40,000 annual allowance restricted, in some cases down to the minimum of £10,000.
For defined benefit schemes, any growth in the individual’s fund exceeding the revised annual allowance would incur an annual allowance charge if they did not have any unused allowances from the previous three years to offset against this excess figure.
Whilst this article is focused on NHS doctors, the rules apply to everyone. The most affected by the 2017 rule changes were higher paid public sector workers (doctors were the most widely reported given the volume affected, but were certainly not alone; judges, high ranking public servants, some headteachers etc. have also been caught). This was because the rules themselves are fairly complicated and hard to understand, and the defined benefit plans gave little flexibility and very few options to the members to try and avoid these rules which has led to a number of unexpected tax charges.
The Good News
The vast majority of doctors who are active members of the NHS pension schemes will now continue to receive the full £40,000 annual allowance without having to worry about their allowance being tapered each year.
This will either end or reduce the tax charges that some doctors will have faced over the last few years.
In reality, any active member of a defined benefit pension scheme earning less than £300,000 is now likely to better protected from these tax charges.
What to watch out for
Tax charges are still possible. The effect that tapering rules have had over the last few years and married with the rising inflation which has impacted the scheme growth figures, most doctors have very little or no unused allowances available to carry forward. Therefore if your growth exceeds £40,000 in the year, a tax charge may well be levied. This will therefore still be something for individuals with larger fund values (i.e. closer to retirement) and mid to high earners to watch out for.
Additionally, for those individuals with incomes in excess of £200,000 who may still be caught by the tapering rules, these now go a little further. Previously, the lowest your allowance could be tapered to was £10,000 in the year but this has been reduced further to just £4,000 which could mean even larger tax bills for individuals in this bracket.
On the whole, this is seen as good news for the NHS workforce. The aim of the change in government policy is clearly to encourage Doctors and GPs to continue working rather than taking early retirement, and to take those extra shifts to keep capacity within the NHS which will undoubtedly prove even more important over the coming weeks and months.
This is meant for your information and does not account for your personal situation and specific circumstances. We will of course continue to advise our clients of their individual position as the information becomes available to us. If you would like to discuss your personal position in more detail or would like to go through how the rules are implemented, please do not hesitate to get in touch. Please email email@example.com