Pension planning is already a bit of a minefield, with so many options and investment opportunities available. This was made even more complicated for high earning dental professionals with the introduction of the tapered annual allowance rule by the government in April 2016.
How does the tapered annual allowance affect you?
The tapered annual allowance (TAA) affects you if you have an adjusted income (taxable income and pension savings minus relevant tax reliefs) of more than £150,000 in a tax year. This could see your annual pension allowance lower than £40,000. The allowance is reduced by £1 for every £2 earned over £150,000. However, you will not be subject to the tapered annual allowance if your threshold income (income minus employer pension contributions) does not exceed £110,000.
Ignorance is not a defence with HMRC
The tapered annual allowance is one of the biggest worries for dentists who talk to us about their pension plan, and pension providers like Prudential, are reporting receiving a significant number of enquiries about the allowance.
Many practice owners and other high earning dental professionals are actually unaware that they have exceeded the threshold, and what that means for them. If you meet the criteria of the TAA but continue to pay into your pension over the new allocated allowance, you will be taxed on this. Those with an adjusted income of more than £210,000 actually only receive a £10,000 pension allowance, which could leave you paying tax on £30,000 if you pay £40,000 into your pension.
How can you make sure you are not caught out?
With self-employed income it is difficult to know exactly what you are earning until the end of the year, which can be frustrating if you are likely to fall close to the TAA threshold.
If you think that your earnings might exceed £150,000, then it is worthwhile looking at your options to reduce your liability. Some things to think about include:
- Remember you can carry forward benefits from the past three years – you can give yourself extra allowance by ‘carrying forward’ any unused pension contribution allowance from the previous three years
- Work out your pension contributions – knowing your current financial state will help you with your pension going forward. A good place to start is to request your annual allowance pension savings statement from your pension provider(s) so you can calculate your total contributions for the year
- Claim all the tax reliefs you are eligible for – as a self-employed dental professional, you should claim available tax reliefs to help you to reduce your tax burden and keep you under the tapered annual allowance threshold. Keeping good records of your expenses will help you make full use of the tax relief available to you
- Work with a professional financial adviser – if the thought of working out your adjusted and threshold income fills you with dread, you should work with a specialist. They will help you identify if you will fall into the tapered annual allowance trap, and work with your accountant to identify the best ways to manage your finances that will enable you to reduce any impact.
Work with the experts
If you need a little help with your retirement planning, and don’t want to get caught out by the tapered annual allowance, speak to a member of our specialist team who can help you put together an effective strategy.
Dental and Medical Financial Services has been helping doctors and dentists to build and protect their wealth, whilst saving tax for over 25 years.
For more information call 01403 780 770.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it.