Pension Tax Problem To Be Solved In Budget

The British Medical Association claimed late last week that Chancellor of the Exchequer, Sajid Javid, has confirmed to them that the pension taxation issues for medical staff will be dealt with in the March budget.

What’s the problem?  There basically two problems.

1. When doctors, surgeons and nurses earn too much they may get penalised on their pension benefits.  For members of defined benefit pensions such as the NHS scheme, the equivalent yearly pension contribution is worked out as a 16 X multiple of the increase in your pension entitlement.  E.g. if you pension entitlement increases this year by £3,000 pa dud to a pay rise, promotion or working lost of overtime, the equivalent annual allowance is 16 X £3,000 = £48,000.  In addition, let us assume your pension lump sum entitlement has increased by £9,000.  Total equivalent yearly benefit increase = £48,000 + £9,000 = £57,000.  The annual allowance is £40,000pa, so in this example, you would be £17,000 over and therefore face a tax charge on that £17,000.  Why bother getting promoted, pay rises or working extra.
2. For higher earners (senior medical staff) earning over say £110,000 pa (the annual allowance threshold income) special tests have to be carried out to see if you combined  income and pension benefits exceed £150,000.  This is when the tapered annual allowance rules come into pay where for every £2 over £150,000, the annual allowance is reduced by £1.  In the above example if your earnings where £120,000 pa + £57,000 in total pension benefits accrued in the year, this means a total package £177,000.  This is £27,000 over the £150,000 so the main annual allowance would be reduced by a £1 for every £2 over i.e. a reduction of £13,500 in the annual allowance.   In summary, your £40,000 annual allowance is reduced by £13,500 to £26,500.  BUT your pension rights accrued above in 1. are £57,000.   You have exceeded your tapered annual allowance of £26,500 by £30,500.  That’s a massive tax bill on £30,500 of 40% or more in the above example.

No wonder the NHS is struggling to get senior doctors, nurses and surgeons to work normal hours let alone work over time or tale promotions.

In tax year 2019/20 the Government has said that it will pick up the bill for any NHS staff that elected to have their additional taxes paid by a reduction/deduction from their pension known as “scheme pays”.

Comment

We suspect the government will not be brave enough to wipe out tapered annual allowance in its entirely but are more likely to increase the annual allowance threshold income test to £150,000 so more medical staff fall outside the limits.  In our opinion, this is merely ‘papering over the cracks’ and does not solve the problem long term for the NHS nor indeed senior employees in other areas with similar problems.