Beware the annual allowance: An accountant’s view

Independent practitioners have endured three years of the punitive annual allowance tapering measures. These have caused significant angst and disbelief at some huge tax charges arising from having allowance-busting pension savings. Ian Tongue recaps on the issues and suggests ways to help mitigate the tax.

The annual allowance

The Government sought to restrict tax relief on pension contributions, primarily to recognise that most people cannot afford to pay up to £255,000 into a pension and get tax relief of £127,500, as the additional rate of income tax was 50% in 2010-11.

So, for the 2011-12 tax year, the annual allowance limit dropped to £50,000 and then to £40,000 from 2014-15.

These limits should have ensured most independent practitioners escaped annual allowance charges in most years. 

But from 2016-17 onwards, annual allowance ‘tapering’ was introduced and many consultants had their allowance cut to just £10,000.  

As a result, many consultants will experience an annual allowance charge year after year, particularly those in the new NHS 2015 pension scheme and/or in receipt of a merit award or other increase to superannuable pay.