Author Richard T Lishman, Managing Director of money4dentists, a firm of specialist Independent Financial Advisers who help dentists across the UK manage their money and achieve their financial and lifestyle goals.
Over the years, there have been significant changes to Annual and Lifetime Allowances in regard to how much can be saved before tax charges are applied, and all of them are extremely pertinent to dental professionals.
In 2013/14, the Annual Allowance, which is the maximum amount of 'pension input' that can be accumulated over an input period without an annual allowance charge being applied, was reduced from £50,000 to £40,000. This represents a significant decrease considering how dentists already had to endure the monumental drop from £255,000 to £50,000 between 2011 and 2012. If this allowance is exceeded, a charge will apply that will be added to the rest of the individual's taxable income for the tax year in question. It is worth noting, however, that once the charge is in excess of £2,000, it can be paid from the benefits of the pension scheme – although of course this reduces the benefits that are then available.
It is also important to note that because the value of a pension does not solely refer to the number paid into it, as an Annual Allowance is based on both the worth of any tax relief and the benefits received from the pension scheme itself, you can risk miscalculating your Annual Allowance and tax relief if you include your benefits.
Over and underestimating can also occur if a dentist holds both an NHS and private pension. This is because the Annual Allowance covers all pension savings, which means even if you don't surpass the allowance of a single account, the combination of the two could end up exceeding the HMRC restrictions. State pensions, however, are exempt from this.
Although the Annual Allowance has been capped at £40,000, high-income earners are now subject to further reductions known as the Tapered Annual Allowance – a reform that was implemented on 6 April 2016. This means that those who earn above £150,000 are now affected by a reduction of £1 for every £2 of excess income. It is important to note, however, that if an individual has a threshold income of £110,000 or less, the Tapered Annual Allowance does not apply, even if their adjusted income is greater than £150,000.
As of 6 April 2016, the Lifetime Allowance (LTA) has also changed. Now, the limit on the value of payouts from a pension scheme – whether lump sums or retirement income – that can be made without triggering an extra tax charge is £1 million; that's a loss of £800,000 allowance from 2010/11.
While dentists with registered pensions and certain overseas schemes with an aggregate lifetime saving of over £1 million will be affected, it will also have an impact on individuals under 75 who are in drawdown – so those that are already withdrawing from their pension. Those that go above the LTA will be required to pay a rate of tax at either 55 per cent, if the money is taken as a lump sum, or 25 per cent, if the money is received in pension payments or cash withdrawals.
In line with this, two new forms of transitional protection have been introduced for individuals with UK tax relieved pensions of more than £1 million, and those who think they may have rights in excess of £1 million by the time they withdraw their pension benefits. They are known as 'fixed protection 2016 (FP16)' and 'individual protection 2016 (IP16)', and can be applied for through HMRC from July 2016. As previous forms of transitional protection are still effective, it is worth noting that FP16 is not available to those with primary, enhanced or fixed protection from 2012 or fixed protection 2014. Similarly, IP16 is not available to those who hold primary protection.
As FP16 fixes the LTA at £1.25 million, and the IP16 will have a protected LTA of the value of the individual's savings on 5 April 2016 subject to an overall limit of £1.25 million, protections are certainly worth exploring.
With these changes now beginning to take effect, it would be prudent for those wishing to know the extent of the implemented changes to seek advice from an Independent Financial Adviser (IFA). Specialist IFAs, such as those at money4dentists, can provide tailored support and guidance to ensure that dentists maximise their tax relief and don't exceed HMRC limits.
With other changes afoot, including the abolishment of the government Money Advice Service and the introduction of the Lifetime ISA – both of which were announced at the Spring Budget on 16 March 2016 – now is a good time to plan for your future and protect your present with the help of an IFA.
For more information please call 0845 345 5060, email firstname.lastname@example.org or visit www.money4dentists.com