Pensions Tapered Annual Allowance – How Does It Work?

Q. For the last 3 years I have exceeded the pensions annual allowance of £50,000 / £40,000 due to being a member of the NHS Pension scheme, resulting in additional tax to pay.

I’m concerned about the new Tapered Annual Allowance which will be effective from the 2016/17 tax year.

Can you explain how it works? 

A. You’re quite right to be concerned.

This is another way for the Chancellor to raise additional taxes whilst penalising those who are taking the responsibility of planning for their future retirement.

As a refresh, the annual allowance is the maximum value of pensions savings that you, your employer and other third parties can pay into your pensions each year without incurring a tax charge.

It includes the value of benefits built up in defined benefit schemes (such as the NHS Pension scheme).

The standard annual allowance for the 2016/17 tax year is £40,000.

From 6 April 2016, you will be subject to a lower annual allowance if you are classed as a high-income individual for the tax year.

You are a high-income individual for a tax year if both of the following apply:

• Your ‘threshold income’ is above £110,000
• Your ‘adjusted income’ is above £150,000

For example, if your adjusted income is £160,000, your annual allowance is reduced on a 2 for 1 basis on income over the £150,000. So, in this case it would reduce by £5,000, which means you’d have an annual allowance of £35,000.

One of the pensions companies, Suffolk Life, has published an excellent 3 page guide, which is worth looking at (it also explains threshold and adjusted).

If you are going to be adversely affected, our advice is to calculate the additional tax due versus what it’s costing to be an active member of the NHS Pension scheme as this will help you decide whether it’s worth continuing to pay into the scheme.

And don’t forget to factor in any lifetime allowance tax charges, if relevant.