Tapered Annual Allowance National Scandal

Published / Last Updated on 25/07/2022

The Health and Social Care Committee headed by Jeremy Hunt MP, has issued a scathing report on the health and care sector with part of the criticism aimed at doctor’s pensions.

The Annual Allowance is the maximum both you and your employer can pay into a pension each year.  It is currently set at the lower of your earnings or £40,000 pa.  This means that most doctors will be capped at £40,000 pa.

The issue is that if you earn, including benefits, more than £240,000 pa, then for every £2 above £240,000 ‘adjusted income’, the pensions annual allowance reduces by £1.  The lowest the annual allowance can be reduced to is £4,000.   The means that:

  • If your adjusted income is £300,000, that is £60,000 over £240,000, meaning on 2:1 reduction, £60,000 excess means a £30,000 reduction off £40,000 annual allowance, delivering a tapered annual allowance of £10,000.
  • If your adjusted income is £312,000, that is £72,000 over £240,000, meaning on 2:1 reduction, £72,000 excess means a £36,000 reduction off £40,000 annual allowance, delivering a tapered annual allowance of £4,000.

The pain for doctors is that the more they work and earn, the greater any taper relief reduction.  The issue also comes with how the equivalent pension contribution is calculated.  This is a multiple of 16 X your increased annual pension entitlement.

For example (and this is a much-simplified calculation), if last year you earned £240,000 and had worked for 29 years, your pension entitlement (using a 1/60th scheme model – yes, we know it is an 1/80th pension + 3n/80ths lump sum scheme – the equivalent of 1/60th) would be 29/60ths X £240,000 = £116,000 pa.

This year, you earn £312,000 as you worked all the hours needed to help with covid-19, NHS back logs, NHS staff absences, shortages, and a promotion. You have now worked 30 years and using 1/60ths, that’s 30/60ths X £312,000 = £156,000 pa.

With last year’s pension adjusted up for inflation, say 9%, £116,000 pa is now £126,444.  With this year’s entitlement at £156,000, this means your pension entitlement has increased by £29,666pa.   This is multiplied by 16X.  £29,666 X 16 = £474,656.  This your equivalent annual pension contribution BUT with tapered annual allowance of just £4,000 pa as you earned £312,000, this means you exceed your tapered annual allowance by £474,656 - £4,000 = £470,656.

This is £470,656 is taxable.  At 20%, 40% or 45% and that is going to hurt.  No wonder doctors and senior health workers are leaving or refusing to take on additional work of overtime.  They just get penalised for it.


The Health and Social Care committee called it a ‘National Scandal’ and we have always thought the same, not just for NHS workers but for all workers.  You don’t have to be a highflyer either.  Imagine you are a nurse, have a pension entitlement of £10,000 pa and then get promoted next year with a decent pay rise and pension entitlement, if your inflation adjusted pension next year had increased by £4,000pa to £14,000 pa.  £4,000 pa increase X 16 = £56,000 pension annual contribution equivalent, this is £14,000 over the normal annual allowance of £40,000.  You face a tax charge on £14,000 just because you got a promotion and got paid a little more.

Not just for NHS workers but for all workers, It is a national disgrace that you get penalised for working hard, getting promotions, increasing your pension entitlement to be less of a burden on the state in later life and you get hammered for an excess annual allowance tax charge.

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