For doctors facing tax charges related to pension contributions, pension recycling could be a good option – but the initiative carries its own complexities.
Pension recycling is the hot topic being discussed by senior Clinicians in the NHS. By April, the Government hopes all NHS trusts will have introduced recycling – through which doctors can opt to receive the pension contribution their employer normally makes on their behalf as part of their salary instead. The British Medical Association (BMA) is pushing for ministers to make it mandatory for trusts to offer this option.
The initiative reflects growing concern about the tax headaches faced by some doctors relating to their pensions – and the detrimental impact this is having on NHS staffing. The NHS Pension Scheme offers generous benefits; these are attractive to most members but in some cases, doctors are breaching the annual or lifetime allowances on pension contributions simply through their membership of the scheme. To avoid the tax bill that results, they are reducing their hours, refusing additional roles and responsibilities, opting not to apply for promotion or even leaving the NHS altogether.
Pension recycling aims to tackle this issue. The idea is that doctors who opt out of the NHS Pension Scheme in order to avoid a tax issue should still be entitled to the employer’s contribution they would have received in the scheme. That way, they can continue to work – and progress their careers – as normal, without facing a tax problem or missing out on an important element of their remuneration.
How much will doctors receive?
So far, so good, but there are complications. In England and Wales, the employer’s contribution to the NHS Pension Scheme is 20.6% of pensionable salary plus a 0.08 per cent scheme administration levy, so this is what doctors might expect through a recycling scheme. However, 6.3% of this contribution is paid directly by NHS England, rather than by the employer.
Similarly, in Scotland and Wales, while every health board has agreed to introduce pension recycling, this is limited to 12.4%. And in Scotland, the agreement only applies to the current year, with a deadline for applications of 28 February.
In England, Trusts are considering whether – and how – to introduce recycling on an individual basis. Growing numbers are introducing this option, though many as explained earlier are offering less than the full 20.6%. Offering recycling does increase the trust’s costs – by around 13.8% of the value of additional salary paid and most want to introduce pension recycling on a cost-neutral basis. Understandably, the BMA argues that the way in which pension contributions are funded is not a doctor’s concern – it is campaigning for the full 20.6% to be recycled by the employer.
In Northern Ireland, meanwhile, the Department of Health has promised to publish a pension recycling policy. So far, however, no detail has been forthcoming at the time of writing.
How will recycling work?
Many employers are offering pension recycling through the NHS Pension Scheme Recycling Employer’s Contribution (REC) payment. By paying salary rather than a pension contribution, Trusts point out, their employer national insurance contributions increase. So, the REC payment reduces the payment by the value of these contributions. Doctors will also have to pay national insurance and income tax on the money they receive.
Many trusts are also offering the option of “contract splitting”. Doctors continue in the same roles with the same number of hours, but their job is effectively split into two near-identical employment contracts. They then opt out of the NHS Pension Scheme through one of these contracts. Alternatively, trusts may allow doctors to combine the REC payment and contract splitting options.
Pension recycling is only available to doctors who can show they have been – or could be – adversely impacted by the annual allowance (AA) or the lifetime allowance (LTA). The scheme is expressly not intended to encourage doctors to leave any of the NHS Pension Schemes. Nor does it imply any recommendation about how doctors should proceed – they will need independent financial advice on their options.
Receiving your recycling payment
Doctors who take up the recycling option will receive a monthly payment alongside their salary. The extra cash does not form part of their base salary, but it will have an impact on other benefits:
- Holiday and sick pay – doctors will continue to receive the payments during these periods of leave, though the value will be adjusted accordingly for doctors who move on to half sick pay or none at all.
- Redundancy pay – where doctors take redundancy, the extra money will not be included in the calculation of the redundancy pay they are owed. This is because the payment is not linked to work done or working hours.
- Income counting towards the tapered AA. Higher earners receive smaller annual pension contribution allowances. The additional payments received through recycling will count towards the income taken into consideration in this regard, so it could reduce the limit on tax efficient pension funding.
Given all these nuances, doctors will need to work out whether they are better off receiving an alternative payment through recycling – with income tax and national insurance to pay – or whether they should stay in the NHS Pension Scheme even after a tax charge related to the AA or LTA. They will also need to consider the impacts on their pension benefits.
Doctors should also bear in mind that by opting out of the NHS Pension Scheme, they become deferred members. These members are entitled to different benefits than active members, particularly in areas such as life insurance, ill-health and death benefits, and retirement benefits.
Are you eligible?
The eligibility criteria for pension recycling varies between employers and between areas of the UK. Doctors will therefore need to check with their employers to find out whether recycling is an option. But as a general rule, doctors will need to be able to show they are:
- Employed in the NHS.
- Active members of the NHS Pension Scheme (some employers will allow those already opted out to be eligible for recycling).
- Affected by the AA because they have previously exceeded the allowance, or are likely to do so in the current financial year or in future years.
- Exceeding the Lifetime Allowance.
- Expecting an AA tax charge for the financial year for which they are making an application for pension recycling. In practice, most employers will accept a best estimate of this possibility, since AA tax charges are not confirmed until after the end of the tax year.
Doctors are responsible for securing their own information and financial advice when considering pension recycling. Help is available from the guidance published by the NHS Pension Scheme, professional organisations and trades unions, and HM Revenue & Customs, as well as from accountants and independent financial advisers.
The Financial Conduct Authority do not regulate tax planning.
Content is correct at the time of writing and is intended for general information only and should not be construed as advice.