Tax relief restrictions on pension contributions
Jun 11, 2019
If you’re an individual on a high income, you may be interested to hear that a pension issue raised by NHS doctors may well affect you too. Hospital doctors and GPs are lobbying the government to amend the pension tax rules. The current system of restricting tax relief on pension contributions means that if doctors take on additional responsibilities, or work additional shifts, many of them end up paying almost all of their extra salary back in tax. But this situation doesn’t just affect doctors – it potentially restricts the tax relief available to other individuals on a high income too, and particularly those who are in a final salary pension scheme.
The NHS Pension Service has alerted members of the NHS Pension Scheme that they could receive a tax bill if their pension savings exceed the limits set by HM Revenue and Customs (HMRC). These limits are known as the ‘annual allowance’, which is calculated each year, and the ‘lifetime allowance’, which is calculated based on your overall pension savings.
Pension annual allowance
The normal pension annual allowance is currently £40,000 per tax year. This is the limit of your pension contributions which qualify for tax relief. The limit covers the combined contributions paid by both you and your employer. A tapered annual allowance was introduced in April 2016, with the intention of reducing pension tax relief for high earners.
You are classed as a high earner if you have an adjusted income of over £150,000, and a threshold income in excess of £110,000. The rate of reduction in the annual allowance is by £1 for every £2 that your adjusted income exceeds £150,000, up to a maximum reduction of £30,000 at £210,000.
The pension annual allowance tax charge depends on your marginal rate of tax. If your income exceeds £150,000 it would be at 45%. So if your pension input for 2018/19 is £40,000 and your annual allowance limit is reduced by the maximum of £30,000, this leaves you with a tapered tax relief of only £10,000. The £30,000 excess will then incur an additional tax bill of £13,500 (45%), on top of your normal tax liability.
Pay your tax bill via your pension fund
If you’ve gone over your annual allowance and the additional tax is more than £2,000, then you can ask your pension provider to pay HMRC directly out of your pension fund. The deadline for the 2018/19 tax year is 31 July 2020.
This is a complex calculation and we can help you plan in order to minimise the impact of these rules, as once you exceed the annual limit you will be taxed on your excess pension contributions.
If you have any queries or concerns about tax relief restrictions on your pension contributions then please contact the PT team and we’ll be happy to help.