What is the Issue?
Many senior employees in the NHS have been affected by significant tax charges on pension growth. This was as a result of restrictions applied to allowable pension accruals, both on an annual basis and covering total lifetime pension savings.
The maximum allowable pension contribution, or ’Annual Allowance’ that an individual can make to any pension is £40,000 per tax year. If contributions exceed this limit, HMRC will seek to charge tax at the individuals highest tax rate on the excess.
Introduced in 2016, the Tapered Annual Allowance gradually reduces the £40,000 Annual Allowance to £10,000 for those on high incomes, meaning those individuals are more likely to suffer an Annual Allowance Tax charge on their pension benefits.
The taper means that for every £2 of adjusted income above £150,000 a year, £1 of the Annual Allowance is lost.
Why are NHS Doctors so badly affected?
The NHS Pension scheme is a defined benefit (Final Salary) scheme, and the value placed on this type of pension scheme is extremely high. The cash value of actual pension contributions is not what is used to calculate the deemed contributions/accruals, but instead accruals are based on increases in capital value and tax free cash retirement benefits. Effectively each tax year, the opening value of rights, is subtracted from the closing value, and the difference is the deemed pension contribution or accrual.
The high value of the pension and salary together, means doctors get caught more often as a demographic than any other working group. The NHS pension scheme is also very inflexible, and members of the scheme are currently unable to lower their accrual benefits in terms of trying to manage the Annual Allowance tax charge.
The recent headline news identifies many senior doctors refusing to work overtime, or considering early retirement, after being hit with exceptionally high tax bills. Some NHS staff were reported to have remortgaged their homes to cover their tax bills.
The BMA has therefore been leading a campaign to get the rules changes, in an attempt to prevent the above, particularly given the NHS is already under pressure on many levels, and the departure of many senior doctors has for example, already directly impacted cancer waiting lists.
The Government have bowed to public pressure, and this week issued a statement to confirm that a further consultation on the rules of the NHS scheme will soon be published, but that principally, they want to allow doctors to set their level of pension accruals themselves at the start of each tax year. Senior clinicians can then set any percentage for contributions and accrual rate, in 10% increments depending on their financial situation. Any balance of unused contribution can then be paid as part of their salary.
This allows individuals to control their pension accruals, but in recognition that the tapered annual allowance affects around a third of NHS consultants and GP’s, the treasury will also look to ‘review how the tapered annual allowance supports the delivery of public services such as the NHS’.
The BMA has welcomed the governments announcement, but recognises the proposed flexibilities may only ‘provide short term relief’ for doctors.
Managing the tax reporting position of excess pension accruals can be complex, and we would always recommend appropriate professional advice. The Private Client Tax Team at Anderson Anderson & Brown regularly help individuals affected by pension tax charges, providing sound, practical advice, and in many cases mitigating cash payments required.
If you have been affected please conact Lynn Gracie (firstname.lastname@example.org) or your usual AAB contact.
To find out more about Lynn and the AAB Private Client Tax team click here.