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Published 12 April 2019
Doctors and senior NHS employees are increasingly triggering significant tax charges for themselves by breaching their “annual allowance” and “lifetime allowance” tax thresholds, through their ongoing NHS Pension Scheme membership. These tax penalties have precipitated an increase in early retirement, and a reluctance to take on additional work (whether pensionable or not) for fear of breaching the annual allowance tax limit.
The annual allowance issue is exacerbated by the fact that a taper applies to the annual allowance threshold, gradually reducing an individual’s annual allowance down from £40,000 to £10,000 for higher earners, with “adjusted” annual incomes between £150,000 to £210,000. In fact, as a result of the complex taper rules, the annual allowance can actually start to reduce for individuals where annual “threshold income” exceeds £110,000.
The lifetime allowance, which changes every year, and is currently £1.055 million, causes a separate, but related problem. If a doctor’s overall pension benefits grow to that value, and reach the lifetime allowance, if they continue being a member of the NHS Pension Scheme, they will pay a much higher rate of tax.
As a direct response there is a growing trend for doctors to retire early or to refuse to undertake additional work to avoid substantial additional pension tax charges. Some senior doctors working overtime in order to try and help the NHS are now enduring marginal tax rates of over 100% due to the tapering annual allowance.
For some senior staff a tipping point is reached where they shouldn’t build up further pensionable service, or they will pay so much more in extra tax (due to their salary level and length of service), that the value of remaining in the NHS Pension Scheme becomes neutralised/negative. In some cases where additional work is undertaken, the additional tax liability which is generated will actually be greater than the value of the net pay earned for the additional work.
The rate of staff opting out of the NHS Pension Scheme is much higher than with other public sector pension schemes: for example, with the Civil Service and Local Government Pension Schemes, the opt-out rate is about 1%, compared to around 16% in the NHS Pension Scheme.
Unsurprisingly NHS employers are now responding by seeking to offer employees who are already (or will be) affected by this issue, a pay cash increment as an alternative to ongoing NHS Pension Scheme membership. This is permissible in principle, provided care is taken to avoid a number of legal risks, including being deemed to be engaging in potentially discriminatory practice.
In the meantime the Treasury is looking at various options, including a suggestion that scheme members should be given the flexibility to stay in the NHS Pension Scheme but reduce their contributions to reduce the risk of breaching their annual allowance limit.
If you have any questions regarding the information set out in this client briefing note, or any other pensions issue, please contact the head of our pensions team, Neil Bhan.
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