As a dentist with an NHS pension, you’ll receive a detailed letter about your pension and a potential tax charge. 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 –
- What is my total income for the year?
- 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.
The calculation of income is quite complex, but to simplify – if your total income INCLUDING pension growth exceeds £150,000 AND your total income EXCLUDING pension growth exceeds £110,000, then your Annual Allowance begins to be reduced.
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.
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