"URGENT - Pensions changes gone mad" - higher earning doctors need to be aware of the additional cash flow implications in January

"URGENT - Pensions changes gone mad" - higher earners need to be aware of the additional cash flow implications in January

VERY IMPORTANT AND URGENT - Doctors need to understand this

The new rules affecting pension savings in the 2016/17 tax year could have unexpected cash flow consequences in January 2018 for our higher earning doctors.

These changes are so complicated that we have been working hard and are continuing to work hard to seek more clarification of all the fine detail involved in these changes. It was discussed at our AISMA conference, and has been exercising AISMA members ever since - I worry for doctors being advised by accountants who are not medical specialists. These changes are causing us massive grief as we try to protect you - the non specialists will be blissfully unaware until their clients get their unexpected demands and penalty notices.

Some of our doctors will have been chased by us recently to put in a protective "scheme pays election" before 31st July if we were concerned you might be close to the limit for 2015/16, but the problem is we wont know potentially for years; however, you might not be able to do a "scheme pays election" next year.

It's a total farce !

How can anyone sensible be expected to run their affairs like this?

However, be that as it may, we have to live with it and do whatever we can to prepare you for the consequences.

Let me explain some of the things we will have to do for you, so if any doctor questions fees   .... when I scream, please be understanding, as well as patient.

 

If you or any of your colleagues fall into the band of taxable income above £110,000, and a large number will, your tax in January 2018 might increase by as much as £10,000 up to £20,000, as we warned you in our recent AISMA newsletter.

It is extremely difficult to understand so you do need to take advice from your pension adviser , or us.

If you have not done so already, we urgently need you to request a Pensions Savings Statement for the tax years from 2014/14 through to 2016/17 and each year onwards going forward, to give us a better chance of warning you early.

You need to understand that they will be inundated with requests, so first come first served.

The problem is this could easily lead to future investigations by HMRC and you will not have done anything wrong other than be unaware that you have a liability, because the figures have not been made available to you.

Up to now, you were able to look at whether or not your "pension pot" increased by more than £40,000 and, if it did, you could elect for your scheme to pay, but under the new rules there is a quirk which means that might not be possible.

Hence this message to you now

Let us look at an example of a quite typical doctor with taxable income of £100,000, with additional private income of £35,000, Rental profits from Buy to let properties of £15,000, and then a deemed growth in the "pension pot" of £30,000.

Up to now, as the pension pot did not grow by more than £40,000, it was below the limit, and there was no additional tax to pay.

Now under the new rules, if your income exceeds £110,000, the "deemed growth in the Pension  pot" is treated as income (for this purpose - see below) and is added to the other income, meaning the total income for this purpose will be treated as £180,000.

Now the sting in the tale - it is a farce, but it is a nasty farce!

Because the "deemed income" is £180,000, the £40,000 allowance is tapered down to £20,000 (a change introduced in April 2016) and the doctor will get taxed on the pension excess of £10,000 (£30,000 over the tapered allowance of £20,000) at 45%, meaning £4500 of additional tax in January 2018

Previously, the scheme would be able to pay, but now under the new rules, the scheme can only pay the tax on the "growth of the pot over the £40,000 allowance , not the tapered amount of £20,000"

The second sting in the tale - under the way the tax rules work , HMRC will assume the same will happen in the following year and so will expect an additional 50% on account of the next year in January 2018 , so the £4500 additional tax bill will increase to £6,750. 

I warned you - A very nasty farce!!!!!

Will NHS Pensions warn the doctor? - no of course not - they are theoretically only obliged to to warn doctors if they have breached the £40,000 allowance, so this doctor might end up getting a future HMRC inspection leading to interest and penalties, even though the doctor has not been notified of the fact that there is additional tax payable on an excess.

It is much more complicated for those doctors in the 1995 or 2008 pension scheme than those in the 2015 scheme, but a lot of doctors will be affected and the medical powers that be need to make a lot more noise about this - it is very unfair in my opinion and is yet another example of "taxing by the back door" - but this time the doctor has not actually received any cash - they are being penalised because their pension pot has increased, and yet their pension pot is not allowed to pay the tax.

Many doctors will be tempted to close their superannuation scheme - I wonder if that is the hidden agenda behind all this - but that is a very serious decision and you need to take advice from an independent financial adviser who understands doctors taxation and superannuation, before you take such a crucial decision.

Mike Ogilvie 

OBC The Specialist Medical Accountants

July 2017

 

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