The Government has made an emergency announcement to prevent staff shortages in the NHS as doctors and senior medical staff either leave or cut back on their hours or else face extremely large tax bills. The fear, this winter is simply there will not be enough staff.
Why should doctors and nurses be treated differently?
The simple reply is they are not. This is not about paying income tax on earnings. A doctor or nurse earning £160,000 pa will pay the same tax as a banker earning £160,000.
Calculating pension annual allowance
HIgh earning medical staff are at risk of incurring large pension tax charges when they breach pension annual contribution limits. The pension annual allowance is £40,000. This is the maximum an employer and employee can pay into a pension scheme each year without incurring tax penalties.
Defined Benefit schemes such as the NHS scheme work in a slightly different way when working the annual allowance. Instead of the actual gross amount paid in the pension scheme, it is a multiple of 16 X the increase in pension benefits.
E.g. Pension entitlement this year = £20,000pa less pension entitlement last year £18,000pa. This is an increase in entitled pension of £2,000pa. This means that annual allowance used this year = £2,000pa X 16 = £32,000 which is below the annual allowance.
What's the tax problem?
There is a reduction in the annual allowance, a Tapered Annual Allowance for staff with an adjusted income of over £150,000. This is the earning limit when the tapered annual allowance starts.
An individual loses £1 of annual allowance for every £2 of adjusted income earned over £150,000. E.g. If you earn £160,000, this is £10,000 over £150,000. On a 2 for 1 reduction this means the pension annual allowance will be reduced £10,000/2 = £5,000. The pension annual alloance for this person is now £40,000 - £5,000 = £35,000pa.
This tapered annual allowance reduction means that someone with an income of £210,000 (£60,000 over £150,000) is left with an allowance of just £10,000pa. On a 2 for 1 reduction this means the pension annual allowance will be reduced £60,000/2 = £30,000. The pension annual alloance for this person is now £40,000 - £30,000 = £10,000pa.
If you are a high earner with a reduced annual allowance of just £10,000pa. You are discouraged from working full time as you may build up more pension funds and be forced to pay higher tax penalties. e.g. HIgher Earner, pension entitlement increases by just 2,000pa (see above). Pension annual allowance use = £2,000 X 16 = £32,000. BUT you only have a tapered allowance of £10,000pa so you have exceeded you tapered annual allowance of by £22,000 and will be taxed on this at 45%.
Why woould a higher earner work or do overtime? why would a specialist medical practioner, doctor or nurse want to work extra hours but to get 'hammered' for 45% income tax on the earnings and then in addiion another 45% on any excess pension built up?
Scheme Pays Tax Bill
For many larger pension schemes such as Oil companies, Banks, Insurance companies, it is legal for the pension scheme to pay these ezcess taxes for high earners.
The Government’s plan is to pay higher NHS earner excess pension tax bills this year covered by the NHS pension scheme under the ‘scheme pays’ process. They have also pledged to make good any reduced pension. This should hopefully persusade more senior staff to work rather than not and avoid staff shortages in the NHS.