This is the limit on how much you can pay into your pension each year. If it exceeds £50,000, the excess is taxed at the taxpayer's highest rate of tax.And of course, you don't find out how much you have paid into your pension for this exercise by looking at how much has been paid into your pension (that would be too easy) instead you have to find out you much your expected pension has increased in the tax year and multiply the increase by a factor of 19.
Part of the reason your pension increases each year is a consequence of the dynamising of all earlier years. Now dynamisation is worked out by applying a formula of consumer price index (CPI) + 1.5%. HMRC discounts the effect of the CPI, so you would think that the only thing we need to worry about here is the 1.5%.
Right? Wrong! The Pensions Agency has chosen a CPI of 5.2% but HMRC has chosen a CPI of 3.1% so we can't just use the 1.5% instead the effect is 3.6%.
Does this really matter? Well, yes. I saw a GP earlier today who is approaching retirement, with profits some 10% above average. The effect of 3.6% dynamisation uses up £47,000 of his £50,000 limit, so once you take into account his profits this year, he is some £36,000 over the limit, creating a tax bill of some £17,000.
And he won't be alone. There will be many GPs who will be hit with this extra tax charge. Remember this charge only arises because government reduced the limit from £255,000 to £50,000.
I was reading this week about the extra revenue being raised by HMRC investigations. The latest thing is to set up taskforces which investigate a particular type of business. Remember the Tax Health Plan? Well there have been 20 different task forces set up so far and another 30 are planned, and so far £500m has been raised over the last five years.
But I have a better idea. Follow the example of the annual allowance. Cut all existing tax allowances and reliefs by 80%, invent a nonsensical formula and then cheat. No need to employ expensive tax inspectors, just sit back and wait for the money.