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Annual Allowance tax charges – are you prepared?

We all know that taxes can be confusing. With changes to the laws surrounding tax and the amounts and allowances individuals are subject to, it can be very difficult to keep on top of what this means for your money. This is especially true when you have so many other things to think about including the wellbeing of your practice and patients.

As such you may not be aware that due to certain changes to how Annual Allowances are calculated, you could be vulnerable to significant tax penalties.

How Annual Allowance works

The standard Annual Allowance for individuals is £40,000. However, for high earning professionals in healthcare professions, this number may be lower. This is because of Tapered Annual Allowance – a measure that was introduced in 2016 and which is still causing confusion today.

Under these rules, professionals who have NHS contracts and who are deemed to receive an income and pension benefits of over £150,000 a year are likely to have a limit lower than the £40,000 stated.

If you’re exceeding your Annual Allowance, even unknowingly, you may suddenly be hit by an expensive tax penalty that can easily number into the thousands.

Your NHS pension contribution

In light of this, it’s important for professionals who think they may be at risk of qualifying for this decreased Annual Allowance to confirm their position.

The first step towards this is to calculate how much you have contributed to your NHS pension. The NHS pension is a defined benefit scheme, and therefore is a little complicated. It is not measured merely by seeing how much you and your employer have contributed; instead it is based on the estimated growth of your pension benefits. This is referred to as Pension Input.

Luckily, this amount should be readily available to see on your Annual Allowance Pension Savings Statement provided by the NHS and it will instantly tell you how much you have invested into your pension.

A question of income

Now that you’ve established your pension contribution, the next step is to work out your income. Whilst this sounds easy, income is actually more complex than you would imagine and there are multiple different ways income is considered, including Earned Income, Unearned Income, Investment Income, Dividend Income, Rental Income, Taxable Income and Non-taxable Income. Additionally, Threshold Income (TI) and Adjusted Income (AI) are also terms that apply to scenarios such as these.

In regards to finding out whether you have a Tapered Annual Allowance, you first need to establish your TI. This is a highly complex calculation that involves subtracting your Pension Contribution (not including the amount from your employer), any taxed lump sum death benefits and any employment given up for salary sacrifice from your Taxable Income (including Earned and Investment Income). If this amount results in a figure exceeding £110,000pa then you may be subject to Tapered Annual Allowance and therefore need to work out your Adjusted Income too.

This is another complex calculation, but in basic terms you need to combine the figures of your Taxable Income (including Earned and Investment Income) and your Pension Input figure from earlier.

By comparing your TI and AI you can see at a glance whether you are included in the Tapered Annual Allowance bracket. For those whose TI is less than £110,000pa, you can automatically assume that this is not the case. If your TI exceeds £110,000pa but your AI is less than £150,000pa this also means that you will not be considered for Tapered Annual Allowance.

However, if your TI exceeds £110,000pa and your AI is between £150,000 and £210,000pa your Annual Allowance will be modified so that for every £2 of AI you earn over the £150,000 cap, £1 of this will be subtracted from your Annual Pension allowance. If your AI exceeds £150,000pa, you will be subjected to even stricter controls, and your Annual Pension Allowance will be reduced to £10,000.

Seek advice

As you can see, working out whether you are eligible for Tapered Annual Allowance is no mean feat, and dental professionals should consider seeking the services of Independent Financial Advisers such as those at money4dentists to receive the best advice. With years of experience in the industry and a deep understanding of how these taxation rules will impact you, the team can work out whether you are affected by the rules of Tapered Annual Allowance, and if so give you the guidance you need to avoid potentially hefty tax charges.

Better safe than sorry

As with all financial matters, it’s better to be safe and check whether this may affect you before it is too late. By seeking advice from professionals with extensive experience in the industry, you can ensure that you aren’t hit with unexpected expenses.

For more information please call 0845 345 5060, email


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