How Doctors Can Use £180K Pension Allowance (NHS Carry Forward Rule)

If your partner dies, for the next 3 years you can actually claim their ISA allowance. So even if you use a general investment account, there are also the ways to invest that efficiently, like an investment bond. Now my question to you is, how much can you then put into your SIP if you are looking to maximize that allowance? What if you've already used up your entire $60K? What can you do? Then there's a rule called the carry forward. The carry forward means you can use up any unused allowance. You can go back 3 whole tax years to use up all the unused allowances.

Um, just a quick, quick couple of quick questions. I saw some financial planner, um, last week because I just talking about investments and things and what to do when I was talking about SIPPs, and they said In order for you to start a SIP, you have to check with your NHS, I think, reward statement, see how much it is. Now, is the amount you can put in a SIP based on your NHS contributions from yourself and your employer plus the growth, or just your contributions? Because I think this year I have too much growth in my '95 and '08, '15 scheme, meaning I may have tax to pay. And I thinking of starting planning investments and using a SIP, then they said you need to check. And how do I check that? Which figures are they?

Fantastic, love it. Fantastic question. And yeah, I think this was one of the things we delved in depth in the tax hack. So the bits you're talking about, you want to contribute money to your pension and then invest. So your SIP is your personal pension. Just to check, I know you've said that, you've told me already, but what's your role? What's your job role?

Oh, so I'm consultant urologist, um, and I've been in the NHS pension for 20-odd years.

Been in the NHS pension for 20-odd years, so you, you probably were part of the '95 section.

Yeah, that's right, about 15 years in the '95 scheme, '95 scheme, and then, um, 10, 11 years in the '15 scheme, 2015 scheme, which is the care difference career average.

Now what the '95 is, is final salary bit.

Yes.

The mathematics around this is this: there's an annual pension allowance every year. This, just the same way you have your ISA allowance is £20K.

Yes.

The annual pension allowance is currently— do you know?

No, I don't know actually.

Sorry to put you on the spot, but this is what makes our masterclasses like you take things away from it. Exactly. The annual pension allowance for 2025-2026 tax year is £60,000.

Yeah, £60,000.

Yeah, good. Last year it was £60,000. Um, I think that changed from— it was— it used to be £40,000, so you've got to be careful. Yeah. Now, how do you work out how much you can put into your SIP? Number 1, you start with £60,000, but then you want to subtract any contribution that is already made to your pension. If you are employed by the NHS, you've had an employer contribution, is 23.7% of your salary. Usually you've had employee contribution. You, Dr. Joseph, they deducted 12.5%, and I'm giving exact figures now because you told me your job. If you're a brand new junior doctor, it might be 9.8% or a little bit less if you are below £65K of income, but I know you're definitely above.

So about £1,400 a month goes from my payslip to pension.

That's good. So £1,400 a month, but basically the tier, it should be 12.5% of your income goes into there. So your employer contribution plus your contribution plus there's usually an adjustment based on inflation. Okay, so this is all together, it contributes to what we call your pension growth, your annual pension growth in your NHS pension, because the NHS pension is a defined benefit pension. It's not the same as like SEP or private sector pension. It's not based on a pot, it's based on basically a calculated figure. 7. There are 7 steps to take before you even start thinking of investing as a doctor healthcare professional. Now this is really important to secure your financial foundation before you start investing. Now I've covered these 7 steps in a simple guide that I've made available for you in the link in the description. You can download it, it will help you to build a solid financial foundation Avoid common investing mistakes and also make tax-efficient investment decisions. Start your investment journey the smart way. Download the guide now using the link in the description, and good luck on your investing journey. Now let's get right back to the episode. So that pension input amount, if it's £40,000 in a tax year, what you can put into your SIP would then be £60,000 minus £40,000. Now we'll come down to the mathematics of it. Sometimes it's boring to do, but we'll come out to the mathematics of it. But basically what you want to know is that your defined benefit pension, if you've got like £40,000 of pension growth— now let it not confuse you if you say pension impute amount, they are the same thing. If your defined benefit pension has given you £40,000 in the tax year Now what you have left is £20,000 because £60,000 is the allowance. Does that make sense so far?

Oh yes, I mean I understood about the £60,000 initially.

Good, good. Don't worry, we'll get to the NHS pension bit. Now what was the difference if your pension growth was £40K? What was the difference?

£20,000.

Good. Now can you go ahead, if you wanted to max out your pension, can you go ahead and put in £20,000 into your SIP at that point? Is it tricky?

No, I don't think so because you've got to, do you not have to then add in the pension growth to the contributions?

No, no. Now we've already mentioned the pension growth is separate. Now we're looking at your pension growth amount, which includes your contribution, your employer's contribution, the adjustment based on inflation to give you the pension growth and also the growth factor. I'm assuming now. I'm assuming that we've dealt with that. We'll come back and look at that number.

Can I just say a quick thing? I don't think, I don't know if all the doctors on this forum, for the last 15 years, none of my colleagues have understood on our total reward statement that each year from NHS pension, for my '95 scheme, I had £12,000 growth this year, but for the '15 scheme, I had £72,000 growth. And why are those figures different every year? So when none of us understood what constituted NHS pension growth, are you saying NHS pension growth is the contributions for your pension that you pay per month plus your employer? And if that is the case, why are they not similar each year? I thought it was money invested and the growth becomes different each year because I've never been liable for pension growth tax in the last 5 years, even if I have my carryover years. But this year it's jumped the figures and now I think I have an amount of tax to pay on the growth.

Let me break it down for you. I wanted to give you the big picture, then we'll come down to the nitty-gritty. I said to you, even some financial advisers bungle this bit up. What I want you to get is the big picture first. We've got £60K. We're assuming that we've worked out the pension growth, which we'll come back to. We're assuming we worked out the pension growth or the pension input amount and it's £40,000 in the tax year. Now, what have you got left? 20K. That's the amount that you have left in your allowance. Now, my question to you is, how much can you then put into your SIP if you are looking to maximize that allowance?

Well, I assume 20,000 that is remaining.

Okay, okay. And that would be the obvious answer, but that would do be the correct answer because remember what I said, when you put in money into your SIP, the government tops it up, right? You get like a boost. So rather than putting 20K, you being a higher rate taxpayer, you're going to get 40% relief and 20% of it happens automatically. So that your 20K, you're getting 25% net. So that's going to be extra 5K. You can then claim the other 5K basically. So what you can put in there will be 15K and then you get the 5K. But you want to be careful basically not to, you know, hit the maximum. Now going back, the question will be, what if you've already used up your entire 60K? What can you do? Then there's a rule called the carry forward. The carry forward means you can use up any unused allowances, because I bet last year you probably haven't used up all your allowances out of 60K. You can use up those unused allowances and you can go back 3 years. Thank you. You can go back 3 whole tax years to use up all the unused allowances. And when you use up those unused allowance, usually you use the current tax year and then you go back to the oldest tax year, the one that you're about to lose, because by April 6th you lose it. That is basically this in a nutshell. Now the biggest stumbling block people worry about is how do I work out my pension growth? How do I work out my pension input amount? Simple formula: B minus A. Okay, simple is overstating it. B minus A, where B is actually your new pension amount, the end pension amount, and the tax here minus A. So the B is going to be the new pension amount multiplied by 16. Okay, I can share this in the group as well, the formula. Multiply by 16 will give you the B minus A. Open a new bracket for A. I wish I was writing on the board. A would then be the old pension amount at the beginning of the period multiplied by 16, and then multiply by the adjustment based on inflation. What the adjustment looks like is if inflation is 5%, it will be multiplied by 1.05. So that will give you A. So B here, I'm— we're getting really nerdy about it, but that when we do like, uh, sort of like in the mastermind and the one-to-one sessions, we work these things out. Because then you can then drill down to your situation and work out what is useful for you. That's part of what we do in the Tax Hack. So that B minus A will give you the pension growth. The pension growth will be the difference between the B and A, and it's not as simple as how much was contributed by my employer, how much I've contributed, because you have to factor in that adjustment based on inflation. Now that is the hard way to do it. The simple but slow way to do it is to ask your pension administrator, and it's your right to issue a pension statement, PSS. They need to give you— and lots of doctors in our mastermind, I don't know how many of you are here already, we've actually gone through this process. Do it tonight so that if you email them by Monday, it takes forever, it takes a while for them to get you your pension statement, statement. So if you get your pension statement, it shows you what your pension growth was. That way you don't have to calculate it. Once you know your pension growth, you know what is left for carry forward. Like, I'll give you an example, Dr. Joseph. If you find out, like, from 2025-2026, you find out your pension growth was $60K, you have nothing to put into your pension. You can't put money into a SIP, right? Because you've used up the entire 60K. If you find out your pension growth was 72,000, that doesn't automatically mean that you have to pay tax. Why? Because even if your pension growth was, um, 72,000 but you have unused pension allowance of 20K from the previous tax year, then you could use your carry forward and take advantage of that, you know. So that's what to look at. It's not a simple just A, B, C, D. Usually it's sort of like delve into it. So a clear step you can do now is contact your pension administrator, ask them for your pension statement. Why that is important is this: you can go back 3 years. So we are currently in 25/26 tax year. You can go back all the way to 2022/2023 tax year. In that year, the pension— do you know what the pension allowance was, the annual allowance was? Just a quick guess.

40.

That was it. Excellent. Perfect. So it was £40K. So you're very unlikely to find any leftovers there, but I've seen people who've seen like £5,000. But whatever you don't use in that tax year is gone by April. And then that means from 2022, 2023, unused allowances, you can use it. 2023, 2024, unused allowances, you can use it now, and all that. So you can go back 3 years. That means for someone like me, if you're not an NHS consultant, I could actually use up £180,000 if I haven't used any of my pension allowances. Okay, I can't use £180,000 obviously because you must have contributed to a pension to be able to make use of— um, you must have contributed to pension in a tax year to be able to make use of carry forward. Does that make sense?

Yeah, yeah, yeah. And then the last quick question was if you Most people are saying, like you said in your thing, you put— if you're making savings investments, you try to put £20,000 in a stocks and shares ISA.

No, I didn't say £20,000, just an example.

I mean, you can maximally put £20,000 in a stocks and shares ISA. If you, God forbid, have more money to invest once you've maxed out your stocks and shares ISA and you have another few thousand in a year, do you recommend putting that in like an investment fund, even though that is still taxed, if you want to invest for long term?

Lovely question. And then why, God forbid? No, it could be— it's a good thing if you have more money to invest. I mean, most of the people in the Mastermind anyway invest beyond £20K. So what could you do? Number one, let's assume you're a higher rate taxpayer. Where I would start would not be my stock and shares ISA. If I've got like pension allowance and I've got like $20K left unused over the last 3 years, I will use that first. Okay, why do I use that? Because I'm going to get 40% tax relief on it, which is basically like my money is boosted by 50% net. If I put in like the same $20K, I end up with $30K when you count the automatic refund from the SIP account and then the other, um, refund I claim through tax relief. So $20K already used up, Let's assume you've used up that allowance, you still had money to invest, then you turn on your Stock and Shares ISA. You could use the £20K. Let's assume you've used up that allowance, you still had money to invest. This is where having a family, if you've got, if you're in a family or you're married, you could actually turn on also those gears. For instance, you have a partner who hasn't used up their entire ISA allowance, you could use up that Stock and Shares ISA allowance in their name. In fact, this is a good point to mention. It's a bit sad, but it's also something that true. If your partner dies, for the next 3 years you can actually claim their ISA allowance. You can use up the ISA allowance. That means you get £40K. Now, we're not hoping for any of that, and I'll borrow your words, I'll say God forbid. But it's good to know, it's good to know that, okay, if that happens, I call it inherited ISA. That's not the official term, but you have an ISA allowance of £40K. But even if your partner were alive and they weren't using their full ISA allowance, There you go, use up that extra ISA allowance. Are we done? No. Have you got kids? If you've got kids, I've seen like your lovely kids show up. Every child in the UK has an ISA allowance of £9,000 that they can use. So in a family of 2 adults and 2 children, you've already got £58k in ISA allowances to play around with. You haven't even started with your pension allowance, which is where I will start now. Is that the end? No. I invested in startup, what do I do? I do it through SEIS. So this is a startup company, the government gives me 50% tax relief on it. Is that the end? No. So you have to explore all these options before you then use a general investment account. So even if you use a general investment account, there are also the ways to invest tax efficiently, like an investment bond, which is a little bit outside the scope of this discussion. Um, but then at this point you start paying capital gains tax. Okay. Let's, let me just say, I promised earlier on, and, um, the doctor who had up to $100K, what he could do at the beginning, for instance, he can start taking his capital gains allowances. He can sell off some of those shares. What I did in my own situation when the Labour government increased the capital gains tax, before they increased it, when I was writing about it in my weekly newsletter, everyone was saying they are going to increase this stuff. What I did is that I sold off all my shares that were not in an ISA and bought them back in an ISA. So of course by then I was going to incur capital gains, but remember there's a £3,000 capital gains allowance per tax year. You've got £3,000. That means right now is very crucial. This is one of the things we actually delved into deep in the tax hack. One of the things is crucial is between now and April 5th, you've got that £3,000 £3,000 capital gains. So if you sell just enough to take £3,000 in capital gains, the next day, April 6th, you have a new fresh allowance that you could also, you know, sell just enough to get. So these are multiple options, but it's a tax efficiency hierarchy. I, I see a lot of people investing £20,000, £30,000 in a, in a regular account. They haven't used up all their ISA allowances. Why? Not because they are not smart, but nobody has ever highlighted it or pointed it out that clearly for them. And sadly, I've seen people who actually have an advisor, financial advisor, accountant they're paying. I don't think it's because the advisors don't know. Sometimes it's like some of them might not— I don't know if they care enough when it's their money. I'm going to be frank because when someone has an accountant and when we went through the tax hack, we got people who were like, why didn't my accountant tell me that I could claim use of my home as an office? And I work as a company, or that I could use my company to buy a limited company, um, to buy my limited company to buy an electric car. Sometimes your accountant doesn't know that that's what you're doing, and sometimes they just couldn't be bothered. Yeah, so that's it. That's the whole point of being in charge of your finances. Well, I hope that helped. I'm just going to take a few more questions. Is that okay?

Of course.

Fantastic.