Avoid the annual allowance trap

As Independent Practitioner Today has consistently reported, the unfair pensions savings annual allowance charge affects medics particularly badly, even those not carrying out private practice. Ian Tongue takes an accountant’s look at the key concepts and potential ways to mitigate it.

The pension annual allowance starts out at £40,000 for everyone, but for those earning more than £110,000, the annual allowance is potentially reduced to as low as £10,000. 

This process is known as annual allowance tapering and it came into force for the 2016-17 tax year and remains effective today. 

You may have escaped the initial effect of the annual allowance tapering, but with each year that passes, it is more likely you could be affected.

One of the most difficult aspects of the calculations to understand is where the figures come from. It is easy to look at your NHS payslip and add up your contributions paid, concluding in the process that you are well under the £40,000 limit. 

But the NHS Pension Scheme is a special type of scheme called a ‘defined benefit’ scheme. Cutting through the jargon, this means that what you get out as a pension is not a product of what you have put in. There are scheme rules and formulas that determine your actual pay award.  

This type of pension scheme is in contrast to the majority of schemes in the UK where the contributions are invested and your pension is based on the value of your fund at the end. This is known as a ‘defined contribution’ scheme. 

Some specialists may have both types of scheme if they took out additional pensions earlier in their career, but it is becoming less common to see consultants still paying into these schemes.

The calculations