Facing a tax bill of thousands of pounds for taking on extra work may sound like a horror story, but it is a reality for many consultants breaching the new pensions rules brought in from 2016. The government has recently pledged to increase the threshold at which the taper on tax reliefs kicks in, however, consultants remain dubious about whether this will fix the problem. For those of us in training, we are unlikely to earn enough to come afoul of the rules now, but it will have implications for our future earnings as consultants. It also has implications on our working environment, given that the changes are preventing consultants taking on extra work to fill gaps in the service.
One of the attractions of a career in medicine was always the generous pension offer, which made up for decreased earning power compared with our contemporaries taking up jobs in the private sector; this latest assault on pensions may make those considering a career in medicine think again before embarking on the career. So, what do you need to know about the pensions rules and what can we do to avoid facing large tax bills in the future?
First a bit of background, this is a complicated area and requires a bit of knowledge to understand how this problem is arising and what its implications are. Tax relief on pensions allows individuals to pay into a pensions scheme before tax is deducted from their pay. So those paying the higher rate of tax of 40% can effectively save £100 in their pension for every £60 contributed. Since 2016 the amount you can save in your pension tax free has been limited to £40,000 per annum, known as the annual allowance. Savings beyond this will incur tax at your marginal rate. However, you can roll over any unused annual allowance from the previous three years. The roll over is why the pension changes have only really started to bite now, as consultants are no longer able to roll over unused allowances from pre 2016 when the limit was £80,000.
Following me so far? Well there is another layer of complexity to this. The annual allowance does not stay static as your income increases. Once adjusted income goes over £150,000, then the amount you can save in your pension tax free starts to decline by £1 for every £2 above £150,000 you earn, this is known as the taper. The taper continues up to an annual income of £210,000 when the annual allowance reaches a floor of £10,000. Note that adjusted income includes pensions contributions made by your employer and is not an individual’s gross pre-tax income. This means that the taper will kick in for NHS consultants once their income goes over the trigger point of £110,000 (calculated by gross income minus pensions contributions). For many consultants on close to this boundary, it can be quite hard to predict when you’re about to go over the threshold. Once over the threshold, HMRC can claim back the tax relief granted to doctors above their annual allowance. When you also factor in the taper in the annual allowance (amount of income you can earn tax free) that kicks in above £100,000, the marginal rate of tax can be over 100% for those going over the threshold. This leads to the situation where senior doctors are being asked to take on extra work to cover gaps in the service for free.
Still with me? Good, but we’re not done yet, there’s still another layer to this. Not only is there an annual allowance to consider, there is also a life-time allowance for the total size of an individual’s pension pot. Previously this was set at £1.8 million but has now been reduced to £1,055,000. Savings beyond this limit incur a tax charge. For clinicians nearing the end of their careers, many will be at risk of breaching this limit, this has led to many being advised to take early retirement to avoid incurring a charge.
So, what has the government done to rectify the problem? At the end of last year the government pledged to cover the tax charges for doctors going over their annual allowance. This allowed consultants to take on extra work without fear of facing 100%, or greater, marginal tax rates. While providing an immediate solution to staffing shortages this winter, this fix is only for the 2019/2020 financial year. This is not a long-term solution, more like sticking plaster to cover up the most severe consequences of the problem in the run-up to the December General Election. Another mooted solution is to allow doctors to decrease their pension contribution in exchange for a decreased pension growth. This would have the effect of reducing employees adjusted income and allow consultants to earn more without breaching the annual allowance. In January treasury officials announced plans to raise the annual allowance threshold income from £110,000 up to £150,000. This proposal has been greeted with scepticism from doctor’s leaders with the BMA calling for the taper to be abolished completely.
The Conservative party manifesto has promised to fix the current NHS pensions crisis, with a Budget expected on March 11th we will see if they are willing to stick to this commitment. Let’s hope they do as until a proper solution is adopted many senior doctors will continue turning down extra work or opt for early retirement.
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