Doctors Pension Tax

Doctors Pension Tax issue could hit lower earners

The pension tax issue affecting doctors could hit more than just the highest earners, industry experts have warned.

Due to complex rules surrounding the annual allowance doctors earning less than ￡150,000 might assume they will not be affected by tax issues, but this may not be true, according to some. 

The tapered annual allowance has become a problem for high earning doctors as it means that for every ￡2 of income above ￡150,000 a year, ￡1 of annual allowance will be lost.

This means they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.

However, as the tapered allowance takes into account projected pension contributions, this can push lower earners over the ￡150,000 threshold and land them with an unexpected tax bill.

Parminder Gill, advice policy consultant at Wesleyan, said: "Anyone whose gross income, minus any tax-relievable contributions such as pension payments, is ￡110,000 or more could be subject to a reduced annual allowance, but this doesn’t necessarily mean that you will be subject to an annual allowance charge. 

"The charge is dependent on the overall growth in your pension benefits in the tax year and there are many factors that can impact the calculation used to work out the growth such as the rate of CPI, increases in your salary, and your overall pensionable service."

For doctors to find out whether or not they are affected by the tapered allowance, they need to work out their threshold income by adding together gross income, for example salary or income from investments, and then deduct any pension contributions, Mr Gill explained.

He said: "If the figure is below ￡110,000 [they] are unlikely to be impacted by tapering, which means [they] will have the standard annual allowance of ￡40,000."

Case Study: doctor on ￡130k income

A doctor has received an annual allowance statement showing that they have an input for the year of ￡48,117 and have therefore breached the standard ￡40,000 annual allowance by ￡8,117. They do not have any current carry forward from the previous five years. 

This doctor earns a total of ￡130,000 of income subject to tax which includes an NHS pensionable income of ￡105,000. 

The first test to check whether the doctor is affected by the tapered annual allowance, and will be subject to a reduced annual allowance, is to see if they exceed the threshold income.

 Threshold income is total income before tax less individual pension contributions. In this case income is ￡130,000 less pension contributions of ￡14,175 which equals ￡115,825. As this figure exceeds the threshold income figure of ￡110,000 we now need to check to see if the doctor exceeds the adjusted income figure of ￡150,000. 

Adjusted income is total income liable to tax, plus all pension contributions, including the value of the employer’s share of contributions. In order for an individual to keep their standard ￡40,000 annual allowance this figure must not exceed ￡150,000.  

On first glance this appears to be below ￡150,000 however we need to ascertain how much is the employer’s contribution. Doctors need to be aware that this is not the employer’s pension contribution percentage as shown on the doctor’s annual total rewards pension statement. 

To calculate the employer’s element you need to take the annual allowance pension input amount which in this example is ￡48,117 and deduct the doctor’s NHS pension contribution which in this case would have been ￡14,175.  

The remaining figure is the employer’s element which totals ￡33,942. This is added to the doctor’s ￡130,000 total income subject to tax to give a total adjusted income of ￡163,942. Therefore they have now breached the adjusted income threshold of ￡150,000 by ￡13,942. 

The doctor’s standard annual allowance of ￡40,000 is then reduced by ￡1 for every ￡2 over the threshold income of ￡150,000 to a minimum of ￡10,000. Therefore in our example the doctor’s annual allowance is reduced by ￡6,971 to ￡33,029. The doctor has now breached the tapered annual allowance by ￡15,088 and this will be subject to tax at 40 per cent or 45 per cent depending on the doctors tax situation.

Doctors can also request a pension saving statement from the NHS Pension Scheme which will show the increase in pension benefits for the previous three tax years.

Mr Gill said: "This is complicated stuff and any doctor concerned about breaching the annual allowance limit should seek financial advice."

Concern about doctors' pensions has increased significantly since the introduction of the tapered annual allowance in 2016.

It emerged in December that the number of members leaving the NHS Pension Scheme was five times higher than that seen at other public pension funds.

Phil Bowler, business development manager at Chase de Vere Medical, said: "Many doctors are unaware of how the tapered annual allowance works and have assumed that they have no tax to pay or have paid tax on a standard annual allowance of ￡40,000 even though [they could] be subject to a reduced annual allowance. 

"This has been in place since the 2016/17 tax year so it may also be the case that many doctors will need to go back to that year to check their situation to ensure they have paid the right level of tax not just in the last tax year but in the preceding years also."

On June 3, Health and Social Care secretary Matt Hancock announced that the government plans to consult on proposals to offer senior clinicians a new pensions option, which will allow them to build their NHS pension more gradually over their career without facing large tax charges.

Plans to introduce a 50:50 option would allow clinicians to "halve their pension contributions in exchange for halving the rate of pension growth", the Cabinet Office and department of Health and Social Care stated.

But according to the British Medical Association the 50:50 proposal won’t remove the incentive for doctors to reduce their working hours, and wider reform is needed.

By Amy Austin