Tax Pensions

From 6 April 2010, you will only continue to be entitled to the standard personal allowance (in 2010/2011 it will remain at £6,475), if you earn less that £100,000 per year. If your income is above £100,000, then for every £2 above the limit, the allowance will be reduced by £1. So if you’re earning more than £112,950 you will lose your personal allowance, effectively costing you an additional £2,590 in tax.

What’s key is that the income figure that is used to calculate whether you lose this allowance or not, can be reduced by making pension or Gift Aid contributions.

Let’s assume a dentist is likely to have an income of £110,000 in 2010/11. Their personal allowance will therefore be reduced by £5,000. So if they make a pension contribution of £10,000, they would reduce their total income to £100,000 and regain the entitlement to the personal allowance. Total savings are as follows:

Tax relief on pension contributions £10,000 @40% £4,000
Reclaimed personal allowance £5,000 @40% £2,000
Total tax saving £6,000

So they have now £10,000 invested in a pension with a net cost of only £4,000.

If contributing to a pension is an option, it’s worth considering the upcoming changes. From 6 April 2011 anyone with a gross income over £150,000 the tax relief available will be tapered away from full relief to 20% relief for those with income over £180,000. So it makes sense to make those pension contributions sooner rather than later.

Any dentist that earns over £130,000 and whose employer contributions pushes them over the £150,000 could also be included but as NHS employer contributions are 14%, this might only affect those that have recently incorporated and want to make large pension contributions direct from their company.

To prevent excessive over funding prior to the Budget change being enforced, the Government has introduced some anti-forstalling measures. This means you may be able to get full tax relief on contributions of up to £20,000, and in case some cases, £30,000, in 2009/10 and again in 2010/11. Whether you’re entitled to the higher level or not depends on your previous contribution record. If you fail to take advantage of these allowances (the first one being before 6 April 2010) then you will lose them.