Doctors Warned Of Pension Tax Risk

Doctors on the COVID-19 frontline face paying unexpected tax bills as they work longer hours to tackle the pandemic.

The issue is complicated pension savings limits and tax rules for high earners.

A survey reveals that 75% of doctors do not understand the rules and cannot calculate how much tax relief they can claim when saving into a pension.

And one in three do not know which section of the National Health Service pension that they save into, which is likely to mean they cannot be sure of the age when they can give up work or how much retirement income they are due.

Tax Deadline Looming

Doctors with pension benefits of more than £40,000 for the year could face a tax bill when they declare the earnings on their self-assessment tax return.

HM Revenue & Customs has granted them a grace period to make the calculations and file their returns until February 28. Returns not received until this date will not be charged an automatic late-filing penalty of £100.

But any tax due must be paid by the January deadline. Late payments will attract interest from February 1.

The research by financial firm Wesleyan reveals most doctors have no idea of their earnings under taper relief annual allowance rules and how this effects their retirement savings.

“It is now more important than ever that doctors remain aware of their tax liabilities and submit the necessary information before the self-assessment deadline at the end of January to avoid being penalised further which in the current climate would seem a harsh reality considering the fantastic work, they’re doing supporting our country’s health needs,” said David Noon, head of the Wesleyan’s medical division.

How The Tapered Annual Allowance Works

Everyone has a pensions annual allowance that caps the amount of tax-relieved contributions that they can pay into their retirement savings.

Currently, the limit is set at £40,000 a year.

For high earners, the allowance is tapered or reduced in line with their taxable income each year.

The taper takes off £1 for every £2 of adjusted income earned over £240,000 until the taper reaches the minimum annual allowance of £4,000.

The level of adjusted income was raised from £150,000 to £240,000 at the start of the 2020-21 tax year.

Why The Tapered Annual Allowance Was Introduced

The tapered annual allowance is a political device aimed at controlling the cost of pension tax relief for high earners.

The relief is meant to discourage high earners from reclaiming tax paid at higher rates on their income as they could easier afford to save the £40,000 allowance than an ordinary worker.

Tapered pension allowance relief has two tests to see if the taper applies – threshold and adjustment income.

If threshold income is £200,000 or more and adjustment income is £240,000 or more, taper relief reduces the £40,000 annual pension allowance by £1 for every £2.

An income of £312,000 for the year sees the maximum loss of £36,000, leaving the annual allowance at £4,000 of tax-relieved contributions into retirement savings.

Threshold income explained

The threshold income test is straightforward – if someone earns £200,000 or more in a tax year, they must figure out their adjusted income to apply the appropriate amount of taper relief.

To calculate threshold income, take someone’s taxable income from all sources less some pensions contribution arrangements designed to reduce tax paid.

Adjusted income explained

If threshold income hits £200,000 or more, the adjustment income calculation determines how taper allowance relief is applied.

The first step is working out net income for the tax year.

Then add any tax relief on personal pension savings, including employer contributions, overseas pensions and pension lump sum death benefits.

The final figure is the adjusted income for the year.

If you are an expat with a pension you’ve lost track of, you can find your UK pension. learn how.

Taper Annual Allowance Relief FAQ

Working out the taper annual allowance relief and what to do about it can be a real headache because you must predict in advance how the figures affect your tax status – and if you have made a mistake a hefty tax bill is likely to follow.

Here are some of the most asked questions about the relief.

Does tapered annual allowance relief apply to all pensions?

The taper applies to defined benefit and defined contribution pensions based in the UK – the Qualifying Recognised Overseas Pension Scheme is like a defined contribution pension but is exempt from taper annual allowance relief.
The DB pension taper calculations are different from DC workings because of the nature of the schemes and how contributions are calculated.

Does carry forward apply to the tapered annual allowance?

Yes, you can still look back for unused pension contribution allowances, but you must apply the limits and thresholds that were current for the tax year in questions and not those for the latest tax year.

Will where I live impact my threshold and adjustment income?

Yes. If you live in Scotland or Wales, the amount of tax relief on pension contributions may not stay the same as someone living in England or Northern Ireland pays. 
Income tax rates may vary, but corporation tax, dividends, savings income and national insurance will come under UK rates.

Does the tapered allowance affect the tax I pay?

No. The relief will not alter the amount of income tax anyone pays but does mean they can put less in a pension with tax-relieved contributions.

Does taper relief only affect doctors?

No. Doctors have had some specific problems with taper relief, but the measure relates to anyone earning at or over the threshold and adjustment income levels, like teachers, lecturers, City finance workers and more.

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