A Freedom of Information request by Quilters to NHS Business Services has found that 14,242 NHS workers exceeded the Pensions Annual Allowance in tax year 2019/20 and therefore faced tax bills.
When comparing the above to HMRC figures of 42,350 people exceeding the Pensions Annual Allowance in the same period, this means that 33.6% of all people that exceeded the annual allowance threshold were NHS pension scheme members.
What is the Pensions Annual Allowance?
This is the maximum that can be paid into a pension scheme each year by you and your employer. This is easy to work out with investment linked money purchase pension schemes like a workplace pension, stakeholder pension or personal pension as it is quite literally the gross contributions paid into all your pension schemes in that year.
For defined benefit pensions such as the NHS scheme, the calculation is a little different in that in simple terms it is 16 X times the increase in your annual pension entitlement plus any increase in your tax-free cash entitlement, compared to last year. E.g., if your pension entitlement has increased by £2,000pa and your tax-free cash lump sum has increased by £6,000, then your annual allowance equivalent is £2,000pa X 16 = £32,000 plus £6,000 = £38,000 i.e., just below the £40,000 threshold. If you breach the £40,000 threshold you will face a tax penalty.
For a more detail explanation of calculating the annual allowance for defined benefit schemes see: DB AA
Exceeding the Annual Allowance
For money purchase/investment linked schemes, you will usually receive a tax bill recovering any tax relief granted for exceeding the £40,000 limit. For defined benefit schemes like the NHS scheme, many employees use a system called ‘scheme pays’ where your pension scheme will pay the tax charge, but your pension benefits will be reduced.
Is it any wonder that so many higher paid NHS staff are not taking on more work or cutting back their hours or indeed refusing a promotion or even leaving the NHS? Higher paid workers, and we are not talking millionaires, just a senior nurse getting a promotion of just £5k pa could see them exceeding the annual allowance and facing a tax charge.
Tapered Annual Allowance Pain Too: In addition, higher earning clinicians also faced ever higher tax charges when they exceeded annual earnings for individuals with “threshold income” of over £110,000 and "adjusted income" of over £150,000 that had to be increased on 6 April 2020 with “threshold income” of over £200,000 and "adjusted income" of over £240,000. In short, previously, if higher salaried NHS staff earned over £150,000 for every £2 they earned over £150,000, their annual allowance was reduced by £1 e.g. NHS earnings £210,000 = £60,000 over £150,000. £1 reduced in annual allowance for every £2 over meaning pensions annual allowance reduced by £30,000 from £40,000 to just £10,000 and even bigger pension annual allowance tax penalties. This is why adjusted income thresholds were increased to £240,000 to stop senior clinicians leaving the NHS or refusing more hours.
In our opinion, the annual allowance and the tapered annual allowance are literally an encouragement not to work or enhance your career in any sector. They are counter intuitive.