What you need to know about your pension in 2019
What are the changes and news impacting pensions this year and how does it apply to you?
Doctors lobbying for Pension tax changes also impacting high income earners
Hospital doctors and GPs are currently lobbying the government to amend the pension tax rules. As the current system of restricting tax relief on contributions, means many doctors paying almost all of the extra salary back in tax, if they take on additional responsibilities or work additional shifts. What this means for you is that, this is an issue that doesn’t just affect doctors, as it also potentially restricts the tax relief available to you if you are are an individual with high income. The NHS Pension Service have alerted members of the NHS Pension Scheme, that they could receive a tax bill if their pension savings exceed limits set by HM Revenue and Customs (HMRC). These limits are known as the annual allowance, which is calculated each year, and the lifetime allowance, which is calculated based on overall pension savings. The normal annual pension allowance is currently £40,000 each tax year and limits the amount of pension contributions which qualify for tax relief. The limit covers the combined contributions paid by the taxpayer and their employer. A tapered annual allowance was introduced in April 2016, with the intention of reducing pension tax relief for high earners. It applies to you if you have an adjusted income of over £150,000 and threshold income in excess of £110,000. The rate of reduction in your annual allowance is by £1 for every £2 that your adjusted income exceeds £150,000, up to a maximum reduction of £30,000 at £210,000. This is a complex calculation and we can help you plan to minimise the impact of the rules, as you are taxable on the excess pension contributions over the annual limit.
Request that your pension charge is paid by your fund by 31 July
The Pension Annual Allowance tax charge depends on your marginal rate of tax. Where your income exceeds £150,000, it would be at 45%. Thus, if your pension input for 2018/19 was £40,000 and the limit is tapered to £10,000, the excess of £30,000 would incur a £13,500 tax bill on top of your normal tax liability. You can ask your pension provider to pay HMRC, out of your pension fund, if you’ve gone over your annual allowance and the additional tax is more than £2,000. The deadline is 31 July 2020 for the 2018/19 tax year.
High income child benefit charge and state pension
Last month we looked at tax planning to minimise or eliminate the high income child benefit to keep both husband and wife (or civil partners) looking after a child below the £50,000 threshold. Where your income or your partner’s exceeds £60,000, such that the whole of your child benefit is taxed, you may be tempted not to claim child benefit at all. This may, however, limit the amount of State pension and other benefits, at a later date. Under current rules, both of you must make National Insurance contributions for 35 years to receive a full State Pension. You may claim Child Benefit and choose not to receive the payments, which means you do not have to pay the charge but still receive the associated National Insurance Credits for that year and protect their State Pension entitlement. You should note that grandparents who have ceased working, and are looking after their grandchildren, may also claim NIC credits for that year, which would count towards their 35 year contribution history. Remember that you can check your National Insurance record online on the DWP website to see:
- What you’ve paid, up to the start of the current tax year (6 April 2019)
- Any National Insurance credits you’ve received,
- If gaps in contributions or credits mean some years do not count towards your State Pension (they are not ‘qualifying years’)
- If you can pay voluntary contributions to fill any gaps and how much this will cost
You can check your State Pension online at any time, for a forecast of how much you could get. The service will also confirm when you will reach State Pension age, under the law as it stands. Please also be aware that the Government proposes to increase the State Pension age to 68 from 2037.
Lotuswise Chartered Accountants and Business Consultants can help you and your business succeed. To find out how, please contact us. To also get even more useful business and finance information and tax advice tips, check out our app on Google or Apple stores.
Watch the video here.