The Health Secretary has announced that doctors suffering punitive rates of tax for working overtime and breaching their pension savings allowances will be compensated.
Doctors and other health workers on high earnings have been adversely affected by complex changes to pensions tax legislation over the years by successive Chancellors, resulting in workers now having to turn away extra work for fear of being landed with punishing tax bills.
The problem arises due to reductions on what workers can contribute into their pensions, making it easier for high earners to breach the provisions.
Doctors earning more than £110,000 a year are potentially caught by the rule that reduces the amount they can save into a pension from £40,000 to £10,000 a year. Any contribution higher than this incurs a 45% tax charge.
Back in 2010 the annual limit was in excess of £250,000, but it has since been cut dramatically to this £40,000 figure. For those on high earnings, there is then this additional ‘taper’ which brings the allowance down to just £10,000.
The new proposal is for doctors to take money out of their pensions to pay any resulting tax bills, and for the NHS to then re-top up their pensions before they retire. It will give flexibility for doctors to work extra shifts without breaching their annual pension allowance.
It is understood that this emergency plan will apply for the 2019-20 tax year only, and it will need to be ratified by the new government after the general election.
Currently only the NHS in England has taken this step, but the Scottish Government has also announced that from 1 December, an interim policy will give eligible NHS staff the option to get their employer pension contributions paid to them as part of their basic pay.
There is a shortage of details about the new scheme at the moment, so doctors will remain wary about what financial penalties they could still face.
In particular, it is not clear what the tax effect for doctors will be when the NHS effectively pays their tax. Will there be a further tax charge arising? Will the NHS cover this as well?
The Treasury is still looking at a longer-term solution which it hopes to have in place before the next financial year starting in April 2020. Presumably, an announcement will be made in the long-overdue Budget.
An even longer-term question is how the government encourages investment in private pensions for everyone without there being adverse tax consequences, something that previous Chancellors have chosen to ignore.
If these changes potentially affect you, please contact our team for advice.