The reduction in the Annual Allowance (AA) limit (i.e. the maximum pension benefits that can accrue tax penalty) for those with an income of over £150,000 came into effect on 6 April 2016 meaning the first tax year affected will be 2016/17.
The majority of GPs in Scotland ‘earn’ less than £150,000 per annum but the £150,000 limit is based on an ‘adjusted income’ figure which is calculated by taking taxable income from all sources plus the employer’s share of a GP’s NHS pension growth in the year.
Whilst higher earning GPs (with high pensionable profits) have been aware for a few years of the potential for an additional tax charge on their pension growth in a year exceeding the AA limit, this has not been the case for most GPs.
However, GPs with significant other income (e.g. investment income such as dividends, bank interest or property rents) could find that their Annual Allowance limit is reduced from the current level of £40,000 to the minimum of £10,000 due to the new ‘tapering’ provisions. This would mean that some part-time GPs with below average pensionable profits could potentially face an unexpected tax charge, simply due to their unearned income reducing the AA limit.
Any additional tax charge will mean an increase in the tax payable in January 2018, albeit the final amount will likely not be known until the summer of 2018. There will also be a knock on impact to the assessment of ‘Payments on Account’ due on 31st January and July for the following tax year (2017/18).
For those GPs potentially impacted by this change, they should speak to their IFA regarding their options. This could include ceasing added years contracts, reducing income from outside posts (e.g. ‘Out of Hours’) and opting out of the NHS scheme for a period before opting back in.
In terms of meeting such additional tax liabilities, any GPs potentially impacted should start to put aside extra funds although there is the option for GPs to elect for the NHS pension scheme to pay some of the tax on their behalf.
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The information in this blog should not be regarded as financial advice. This is based on our understanding in April 2017.