Advice on Annual Allowance changes
One of the main topics of conversation at GP practice meetings this year should be unfortunately, the ‘Tapering of the Annual Allowance limit’ with regard to pensions. New rules from 2016/2017 are leading to huge increases to many GP’s tax bills from January 2018 onwards. GP’s ignore this legislation at their peril!
2015/2016 in contrast saw the majority of GP’s escape an Annual Allowance tax charge but the goalposts have now moved and this should be a clear message that you have taken and understood from your accountant or IFA.
2016/2017 saw the introduction of tapering of the annual allowance limit. Those earning over £110,000 may well see their annual allowance limit reducing from £40,000 down to a possible £10,000 depending on individual levels of total income. When this happens unused relief that may have been generated in 2015/2016 and earlier years is likely to be used up in full in 2016/2017 which may mitigate a tax charge but very often will not remove it altogether. This is real extra tax that will need to be paid for no extra growth in pension when a GP retires. The extra tax for 2016/2017 is payable in January 2018 and the position will be potentially worsened due to the knock on effect to the first payment on account towards 2017/2018 tax.
The tax year 2017/2018 gets worse as most higher earners will by that point have no unused relief left to offset and the CPI rate which will be used as part of the dynamising calculation is based on the September 2017 factor. September 2016 saw a factor of 1%, it is largely expected September 2017 will be higher thus giving more growth to pension pots. As an extra point it should be noted that the growth rate in the new 2015 scheme is in fact faster than in the 1995 scheme so individuals in this scheme will see pension growth at a faster rate. A small growth in inflation with no other changes can have a large effect on annual allowance growth.
We are advised by the Specialist Medical Accountants acting for a number of our GP’s that the increases in tax liabilities that they are seeing as a result of these rules are often staggering in size and this is an area that must be looked at very carefully.
If you have not been asked to already your first step is to download a Total Rewards Statement from NHS pensions website. You will need a government gateway login first to enable you to do this. Make sure this has been forwarded to your accountant for careful review. The Total Reward Statements will not be fully up to date they are likely to be live to 31st March 2015 but your accountant should be able to extrapolate forward from this with your last two years’ pensionable earnings.
Whereas Life Time Allowance planning may well be a conversation that you need to have with your IFA, your accountant has a duty to review your Annual Allowance position if information can be obtained in order that your Income Tax Return can be prepared as accurately as possible. It is not advisable to await statements setting out your position from NHS pensions agency as under the current system these will be sent out after the date at which your Income Tax return has to be submitted. As always if with hindsight extra tax is found to be due, HMRC will charge interest on late payment of tax and there could be the possibility of penalties.
Eventually NHS pensions Agency should advise you of your Annual Allowance breach although this cannot be relied upon without request.
Self Assessment tax is clear that the individual remains responsible for declaring all tax due, NHS pensions agency will not be in any way responsible . Beware also:
a) The NHS pension saving statement setting out any breach will not have considered any non NHS pension contributions made.
b) Will be potentially many months after the tax is due giving a nasty shock of tax effectively payable immediately.
c) This is retrospective, once a tax charge has arisen it cannot be reversed if you know in advance what is likely to happen you have a chance to take mitigating action.
d) In a number of cases the tax numbers are enormous and facility to pay this tax will need careful planning.
e) These rules are not only a problem for GP’s with big pension pots who are near end of career, many young GP’s are also being hit where earnings are high.
you are not getting the right advice on this area of your tax and pension affairs please consider your position very carefully. There are ways to mitigate the tax and you need to consider if any of these are appropriate to you.
Written by Roger Morgan, Sandisons and Sally Sidaway, RSM Tenon, October 2017