In recent months there has been significant press coverage on NHS staff facing unexpected tax bills relating to how they fund their pensions. Many doctors and other high-earners are now asking why they are having to pay more tax for simply being part of, and contributing to, the NHS scheme.
Why is this the case?
To bring you up to speed with the changes, we will have to go back a few years to 2006. Legislation was introduced that limited the amount that you could pay into a pension each year and receive full tax relief. This is known as the ‘annual allowance’ and at its highest, the limited reached £255,000.
“changes were introduced to target high earners…
This has dropped quite considerably over the years, where today, the annual allowance stands at £40,000. And it doesn’t stop there. Another bout of legislation was introduced in 2016, called the ‘tapered annual allowance’ which gradually reduces the £40,000 limit down to as low as £10,000. The purpose of ‘tapering’ was introduced to target high earners making generous pension contributions but what the government didn’t account for was the impact it would have on members of the NHS pension scheme, and in particular, doctors.
“the government didn’t account for the impact that it would have on doctors…
Why is this such a problem for NHS pension scheme members?
The tapered allowance coupled with how the NHS pension scheme is valued plus the rigid nature of the pension scheme have all led to some members receiving unexpectedly high tax bills for simply being part of their employer’s pension scheme. And of course, the more shifts taken on to fill the staffing rota, the higher their potential tax bill. To manage the situation, doctors feel they are having to reduce their hours, leave the scheme all together and in some cases take early retirement.
How will I know if I will be affected?
For most, paying £40,000 or even £10,000 into a pension each year may seem far off, especially as the highest contribution rate currently stands at 14.5% on pensionable pay over £111,377. However, the way the NHS pension contributions are valued is not as straight forward as a simple monetary amount but rather based on a deemed increase in entitlement. And with the introduction of the tapered annual allowance, more people are being caught in this tax trap without even knowing.
Broadly speaking, if you earn close to or above £130,000 or had a substantial increase in salary, there is a good chance you may be impacted by these changes.
“there are some planning points that may be taken advantage of…
However, it is important to remember that all forms of income (not just NHS earnings) need to be taken into account – as well as all other pension contributions such as AVC’s and personal pensions.
“What are my options?”
As is common, apathy rules in the world of pension planning. Many will find themselves getting on with their busy lives unaware of the pension rules until a tax bill arrives.
However, there are some planning points that may be taken advantage of:
- Carry forward any unused allowances from previous tax years
- Reduce private pension contributions being made
- Make a one-off pension contribution in certain circumstances
- Reduce your pensionable pay
I mentioned doctors were leaving the pension scheme but this should be seen as a drastic measure as, for most, the benefits of being a member typically outweigh that of not.
“What should I do?”
The calculations and planning around them, can become fairly involved.
As such, the proper advice can add tangible value. If you would like a confidential, no-obligation appraisal of your current circumstances, please get in touch.
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