Tapered Annual Allowance 2016/17 – Potential Tax Bombshell January 2018
As if the pips weren’t squeaking enough, there may be more bad news on the way. In 2016/17 we saw the introduction of the Tapered Annual Allowance (TAA). Most people will be aware that the Standard Annual Allowance (SAA) in 2016/17 was £40,000. This is the maximum amount you can save in a pension scheme in that year before tax charges arise. In an occupational pension scheme such as the NHS scheme, this is nothing to do with the contributions you make, but is a measurement of the capitalised increase in the value of the pension benefits from the start of the year to the end, allowing for a cost of living increase on the starting position, known as pension growth.
What was new in 2016/17 was that the SAA may be reduced for high earners to a minimum of £10,000. Quite a number of our medical clients will fall into this category and will have increased annual allowance (AA) tax liabilities as a result. Where liabilities have previously arisen due to AA charges many clients have had the option to make a scheme pays election for the NHS pension scheme to pay the charge and have their final pension benefits reduced at retirement to recover the tax paid for them. The fine detail of the ‘scheme pays’ legislation may mean that is not the case in 2016/17.
Dr Prodit has pension growth in 2016/17 of £55,000, with no unused allowances available to be brought forward from earlier years. His earnings in 2016/17 are such that the taper kicks in and his TAA is the minimum of £10,000. He pays tax at 45%.
The excess saving above the available allowance is, therefore £45,000 and tax of £20,250 is due.
Is ‘scheme pays’ available?
The NHS Pension Scheme is only obliged to accept a scheme pays election to the extent that the growth in the scheme exceeds the SAA (£40,000) and not the TAA (£10,000 in this case).
The excess over the SAA is £15,000, meaning tax at 45% of £6,750 can be dealt with under a scheme pays election but not the balance due.
Dr Prodit must therefore find the balance of tax due, £13,500, and pay it with the remainder of his tax through his tax return in January 2018.
Worse still, the tax for AA charges also forms part of the payments on account for the following year, meaning the full additional payment at January 2018 is £20,250, with a further £6,750 due the following July.
Where possible clients who might be affected will need to make plans to mitigate their tax exposure