Doctors have been retiring early and turning down extra shifts because their higher earnings generate pension contributions in excess of the permitted level of their annual allowance, leading to a penal tax charge.
This charge can apply to any high-earning taxpayer but members of final salary pension schemes are particularly hit because of the complex way in which the value added to the pension pot is calculated.
Most people have a pensions annual allowance of £40,000 per year but for high earners, the annual allowance is tapered down to a minimum of £10,000 per year if their total income exceeds two thresholds:
• adjusted net income over £150,000 (all income plus pension contributions)
• threshold income over £110,000 (net income excluding pension contributions)
These thresholds will increase to £240,000 and £200,000 respectively from 6 April 2020 meaning that many taxpayers caught out by the taper rules – and who suffer the annual allowance tax charge as a result – will not have to pay that tax charge for 2020-21.
The minimum level of the annual allowance is also being reduced to £4,000 where the taxpayer’s adjusted net income exceeds £312,000.
It is worth remembering that taxpayers with a tapered annual allowance can use 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.
