The Tapered Annual Allowance and the NHS Pension Scheme
The annual allowance is a limit on the total amount of benefits that you can build up in the NHS Pension Scheme and other pensions each year, for tax relief purposes. The standard annual allowance is currently capped at £40,000. However, for higher earners this allowance is now being tapered.
High-income individuals that will be caught by the new rules are those with:
1. ‘Threshold income’ of over £110,000, and
2. ‘Adjusted income’ of over £150,000 for the tax year.
For those subject to the taper, every £2 of adjusted income above £150,000 will reduce their annual allowance by £1. The maximum reduction will be £30,000, thus reducing the annual allowance to £10,000 for anyone with adjusted income of £210,000 or above. Click here to see a tapered allowance example.
Adjusted Income (£150,000 and over)
Adjusted income is the total of all sources of taxable income falling in the tax year plus the value of any pension saving in that year. This is to ensure that the restriction applies fairly and cannot be avoided, for example, through using salary sacrifice. There are certain steps for members to consider when calculating their adjusted income. Click here to see them.
Threshold Income (£110,000 and over)
To provide some certainty for Scheme administrators and members over who may be affected, and to ensure that lower paid individuals are not affected, the taper is subject to an income floor of £110,000 (being £150,000 less the Annual Allowance) of what is normally a member’s net income for the tax year. There are a few steps for members to consider when calculating their threshold income. Click here to see them.
What does this mean for the NHS Pension Scheme?
The NHS Pension Scheme must provide a Pension Savings Statement to members who exceed the Annual Allowance by the 6 October following the end of the tax year that gave rise to the charge, provided the employer has supplied relevant information by 6 July.
The inclusion of all types of taxable contributable income in the definition of adjusted income will make the identification members affected by the Tapered Annual Allowaalignnce difficult because only the member or an accountant will hold the required information. In many cases this might not be possible until the relevant tax year has ended.
Members who calculate that they have an adjusted income of between £150,000 and £210,000 should then consider requesting a Pension Savings Statement from NHS Pensions.
How can Lionmede help you?
Members with higher earnings should seek independent financial advice in connection with the calculation of their adjusted income and threshold income, taking account of income received from various sources, to identify whether their Annual Allowance is to be tapered. Here at Lionmede we can offer bespoke financial planning and investment management advice. Our aim is to provide an independent, professional and reliable service that is focused on growing and preserving the wealth of our clients.
If you would like more advice you can speak directly to our director, Luke Hurley, via LinkedIn or email (luke.hurley@lionmede.co.uk).
The information in this article does not amount to personal advice. You are strongly advised to obtain specific, personal advice from an independent financial adviser about your own circumstances and not to rely on the information or comments in this article.