23rd April 2018
What have pensions got to do with tax? Well apart from the fact that in certain circumstances pension contributions can represent a tax effective method of saving for the future, the complexity of pension rules and regulations could just leave some individuals facing an unexpected tax bill.
Now let’s make it clear from the start that this article is not designed to give advice on the merits or otherwise of any pension schemes. So if you are looking for general or specific advice with regard to a pension scheme or savings then our sister company, Thompson Jenner Financial Services Ltd, would be happy to hear from you. Moreover, although we use the NHS pension scheme as an example within this article, the scenarios discussed are not unique to the NHS and could impact other high income individuals or those in defined benefit schemes.
With that in mind let’s look at some of the specific tax issues related to pensions which could catch out the unwary. And let’s start with the amount which you can pay into a pension in any one tax year which currently stands at £40,000.
Sounds simple? Well for the majority of people it probably is but there are exceptions. For example, for those in a defined benefit scheme the allowance is calculated not by the amount which has been paid into the pension but by the deemed growth in your pension benefits over the tax year. The calculation is slightly complex, taking into account opening and closing values as well as a CPI modifier, but higher earners could find that a pay rise may take them over the limit, thus triggering a tax charge.
Similarly, high income individuals in the NHS pension scheme such as Partners in GP practices, consultants or some dentists may also be caught by the tapered annual allowance which was introduced in the 2016/17 tax year. And if that wasn’t enough, those who have been in the profession for a number of years may also find themselves up against the lifetime allowance which currently stands at £1,030,000. Oh, and irrespective of your salary level, if you have already started drawing against a pension then you may find yourself subject to a reduced annual allowance of £4,000.
As we mentioned before whilst we can’t provide pension advice, we can assist with tax planning. This could include calculating any annual allowance charge due and identifying potential tax liabilities. For those who are members of the NHS pension scheme we can also advise on whether a ‘Scheme Pays’ election, in which the NHS pension scheme covers tax liabilities in return for a reduction in benefits, would be beneficial.
Thompson Jenner Exmouth Partner Paul Carnell commented “pension tax calculations can seem simple but legislative complexities can catch out the unwary. Being aware of potential tax liabilities can be invaluable in planning for a tax-efficient future.”
If you would like to find out more or meet to discuss the tax services which we are able to provide, please contact Paul Carnell, one of our other Partners or one of our tax advisers in Exmouth & Exeter on 01392 258553 or 01395 279521 to arrange a free initial meeting.
