Billed as the most important Budget of recent times, the newly-appointed Chancellor, Rishi Sunak, took to his feet at 12:35pm on March 11 to deliver his first Budget statement.
Would we see an end to punitive pension tax rules which are forcing doctors to reduce their work or even leave the NHS?
Waiting keenly on the answer would be representatives of the British Medical Association, the Royal College of GPs and nine other prominent health bodies who have petitioned the government for fundamental reform to the pension tax system for doctors and to remove the taper and annual allowance for defined benefit schemes, including the NHS Pension.
Why are current pension tax rules causing problems for doctors?
Introduced in April 2016, the tapered annual allowance potentially exposes those with a threshold income [earnings from all sources before tax, less any pension contributions made] above £110,000 to a reduction in their annual allowance from £40,000 to as little as £10,000.
The tapered reduction will not normally apply for threshold incomes below £110,000.
Above £110,000 you need to check if your adjusted income [earnings from all sources before tax, including your own and your employer’s pension contributions] is above £150,000. If it is, your annual allowance will be reduced by £1 for every £2 that your adjusted income exceeds £150,000.
The problem for doctors, and indeed all active members of defined benefit pension schemes, is that they have little control over how much their pension benefits increase in any year. So, breach the threshold income, as many senior doctors have, the deemed value of your pension accrual [the pension input amount] is added to your threshold income value, and if the total value exceeds £150,000, your annual allowance will be reduced.
This has given rise to a cliff-edge anomaly, whereby the difference between having threshold income a pound below £110,000 and a pound above it can result in a tax bill of thousands.
Take the example of a doctor with a threshold income of £117,298.00, the deemed income for the adjusted income test is £179,387.84 (£117,298.00 plus £62,089.34 pension input amount). The annual allowance will be tapered by £1 for every £2 in excess of the £150,000 limit, resulting in a reduced annual allowance of £25,306.33 (£40,000 – (£29,387.34 ÷ 2)), meaning tax is now due on an excess of £36,783.01 (£62,089.34 – £25,306.33).
This situation has provided every incentive for doctors to keep their incomes to below £110,000, by either retiring early or refusing extra work for fear of having to pay for the privilege.
Temporary pre-election deal
As a short-term fix, for doctors in England and Wales, ahead of last December’s general election, the Conservative government committed to footing the tax bill for doctors breaching the annual allowance, for the 2019-20 tax year only.
Having also committed to launching an urgent review into how to solve the taper dilemma, albeit with no promise to scrap the taper, the healthcare community was expectant that the Chancellor would present the outcome of the review in his March Budget.
At 1:34pm the wait was over.
What was announced?
Those predicting the Chancellor was more likely to tinker with the taper rather than do away with it altogether were “almost” proved right. Mr Sunak confirmed the Treasury’s plan to increase both the threshold and adjusted income levels by £90,000 to £200,000 and £240,000 respectively, much higher than commentators were expecting. Additionally, that the minimum annual allowance, after tapering, would fall from £10,000 currently to just £4,000. This would kick in for those with adjusted incomes of £312,000 or above.
Promoted as a sign of the government’s commitment to supporting hard-working doctors, the Chancellor estimated that 98% of hospital doctors and 96% of GPs will fall below the new threshold, solving the problem for most doctors concerned about taking on extra work for fear of large tax bills. But that would still leave 2% of hospital doctors and 4% of GPs who could be affected by the complexities of the taper, and are unwittingly landed with heavy tax bills.
So, a positive development, just not for all.
How will this impact me?
While there will be fewer doctors impacted by the tapering system, don’t be lulled into thinking you may not be hit with an annual allowance charge. Even doctors on more modest incomes may find themselves on the wrong side of the standard annual allowance of £40,000 and facing a potential tax bill. So, as a general rule, keep a watchful eye on your pension growth, and if in any doubt, request an annual allowance statement from your respective pension agency. If you believe you’re on course for a tax charge take professional advice from a NHS pension specialist.
The Financial Conduct Authority does not regulate tax advice.
Content correct at time of writing and is intended for general information only and should not be construed as advice.