Doctors have been retiring early and turning down extra shifts because the extra earnings pushes their pension contributions over the permitted level of annual allowance, leading to penal tax charges. The Budget has gone some way to solve this problem for high earning medics from 2020/21.
“High earning” in this context means having adjusted net income of over £150,000 AND threshold income of over £110,000. These thresholds will increase to £240,000 and £200,000 respectively from 6 April 2020.
“Net income” is basically income from all sources including the value of pension contributions, “threshold income” is net income less all pension contributions (see link below).
These higher earners currently have their pensions annual allowance tapered down by £1 for every £2 over the threshold to a minimum of £10,000 per year. From 2020/21 this minimum will be £4,000 in line with the MPAA.
However, unlike those subject to the MPAA, taxpayers with a tapered annual allowance canuse up any unused annual allowance brought forward from the three immediately preceding tax years (ie 2016/17, 2017/18 and 2018/19). The unused allowance from 2016/17 will drop out of the calculation for contributions made on and after 6 April 2020.
When the value of pension contributions exceeds the available annual allowance, the taxpayer must pay an annual allowance charge. Where this charge is more than £2,000 they can ask the pension scheme to pay under the “scheme pays” rules. The detailed rules are complex, so take advice from a qualified IFA.
Contractors who are winding down their companies, as they will be caught by the off-payroll rules from 6 April 2020, may want to extract the maximum cash as pension contributions before that date.
You will need to work closely with their IFA to ensure that the company has sufficient available profits and the individual has the available annual allowance. A pension contribution paid after the company has ceased trading, and has no income, will not get tax relief on that contribution.
Remember you should not recommend that a payment should be made into a specific pension scheme unless you are authorised to give financial advice and registered with the Financial Conduct Authority (FCA).