Wednesday 21st February 2018

Why dentists may need to pay extra tax for their NHS pension

As a dentist with an NHS pension, you'll receive a detailed letter about your pension Annual Allowance. It can be difficult to understand, but essentially, there may be an additional tax charge to pay if the value of your pension has increased over a certain amount.

Most dentist won’t need to pay this, but you need to know because it’s your responsibility to inform HMRC when this happens.

To work it out, there are 2 things you need to know –

  1. What is my total income for the year?
  2. How much has my pension increased by?

This is because there is a limit (Annual Allowance) on how much you can pay in to a pension, and this limit can change when your income is higher.

1. What is my total income for the year?

Before we answer that, we should explain that the Annual Allowance of £40,000 is normally the most you can pay in to your pension(s) before incurring extra tax.

However, your Annual Allowance can reduce to as low as £10,000, depending on your total income for the year.

If you

If you exceed these amounts, your Annual Allowance will be reduced

The calculation of income is quite complex, but to simplify – if your total income INCLUDING all pension growth is over £150,000, AND your total income EXCLUDING pension growth is over £110,000, then the Annual Allowance is gradually reduced as your income increases.

Once your total income is over £210,000 including pension contributions, then the Allowance is £10,000 per year.

A little bit of good news

If you don’t use all your Annual Allowance, you can carry it forward for up to 3 years. You don’t need to inform HMRC about this.

2. How much has my pension increased by?

What you have actually paid in doesn’t matter, it’s the increase in value that’s relevant. The increase in value is calculated as the difference between the value of your pension at the beginning and the end of the year.

When inflation (based on the consumer price index – CPI) is higher, then the increase in the value of your pension is higher.

Higher inflation affecting next year

In September 2017, inflation was 3% - higher than its been since 2011. This means the increase in your pension for 2018/19 will be higher than the last 6 years

If the increase in value is over your Annual Allowance, then you need to calculate by how much, and how much tax is due.

What do I need to do?

  • Check the figures in the letter you receive from the NHS each year
  • Forward a copy to your accountant/tax advisor and ask them to calculate whether there’s a tax charge.
  • If there is an additional tax charge, it should be included in your self assessment tax return
  • Pay the tax:- If its over £2,000 – you can ask NHS pensions to pay the charge, which will then reduce your pension at retirement
                         - If its under £2,000 – pay the tax as part of your total tax bill for the year

We will link your business bank account to Xero software. All your income and expenses will feed directly in to Xero. This saves you time in preparing your year end paperwork, and you can even store your documents in Xero