Tax on doctors’ pensions – what next?

26th November 2019

Recent months have seen the recognition at government level of the costly impact of current pension tax legislation.

Substantial charges on their pensions have led to doctors declining overtime and, in many cases, reduce or consider reducing NHS work.

The main tax legislation changes resulting in the current position have been: -

  • Pension annual allowance of £255,000 reduced to £50,000 in 2011/12, and further reduced to £40,000 in 2014/15
  • From 2016/17 income levels adjusted for NHS pension growth in excess of £150,000 can see the annual allowance tapered to as little as £10,000.

The changes generally affect those with taxable income from medical plus all other sources exceeding £110,000.

For the current tax year to 5 April 2020, the latest announcement (November 2019) to encourage doctors to take on additional work over the winter period is to pay tax charges from their pension benefits using ‘scheme pays’.

However, before doctors retire, the NHS will top up their pension, meaning the cost of the measure to the NHS is spread over time, while doctors will not be out of pocket. Details of how this will be guaranteed for pensions drawn in say 10, 20 or 30 years are not known at the time of writing.

The latest announcement is a ‘sticking plaster’ for the winter, and doctors await a long-term solution.

The recent consultation on NHS Pensions raised pension flexibilities as a potential solution, which would entail reduced pension contributions for a lower pension accrual rate in the anticipation of avoiding pension tax charges. This also offers the potential for employers’ contributions being recycled as additional pay.

Pension flexibilities could still lead to pension tax charges depending on the extent to which they are utilised, coupled with uncertainty at the start of each pension year as to likely pension growth (which is influenced by consumer price inflation in September of each year).

Taking specialist advice on flexibilities, if introduced, would be highly recommended.

Any uncertainty would be removed if the annual allowance was scrapped for defined benefit pension schemes, such as NHS pensions.

The government’s own advisory body, the Office for Tax Simplification, has put this forward as a solution, and it will be of much interest to see if it is adopted.


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