Beware the annual allowance: A financial planner’s view

Will you join the thousands caught out by the ‘taper’? Dr Benjamin Holdsworth sets out the essential steps needed to check your pension’s tax position.

More and more doctors are triggering substantial tax bills because of harsh pension savings regulations, which are difficult to understand and easy to get very wrong. 

In January, a Freedom of Inform­ation Act request to HM Revenue and Customs revealed that the average tax bill individuals faced for breaching yearly pension contribution limits in 2016-17 was £29,635, with some obviously paying much more. 

In total, a record tax haul of £517m was added to Treasury accounts from pension tax breaches that year – when the new limits were first applied. 

Many of those getting caught out are senior doctors with decades of NHS service, tied into making contributions to the pension scheme. 

The annual restriction on the amount you can contribute to your pension free of tax is known as the ‘annual allowance’. 

New rules decrease the standard annual allowance of £40,000 to as low as £10,000 a year for doctors with a ‘threshold income’ of more than £110,000 – this is known as a ‘tapered annual allowance’. 

Excess pensions savings above the allowance will generate a tax bill charged at your marginal rate of income tax.

Extremely complicated

But the ‘taper’ adds another level of complexity to the already challenging allowance. There are several major factors to consider – you will not know your level of income for the year until the end of it and, more importantly, you will not know what your pension input will be, because these are calculated retro­spectively. 

This means you may only find out if you are on course to breach the allowance long after you were able to mitigate the situation. 

It is important to check where you stand for the current year as soon as possible. Here we propose some key steps you should take: