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Pensions are in the news – both the threats to reduce annual allowance in the upcoming Budget, and the increasing number of employees in the public sector being hit with large tax charges above their PAYE.
I was aware of the major changes to the pension scheme in 2015 that hit doctors particularly hard. I understood the injustice of paying more for every pound of pension than the majority of other NHS staff due to the tiered contribution rates* under the new Career Average Revalued Earnings scheme. However, given the constant reminders from the Government and national press about our ‘gold-plated’ pension I’d assumed everything would be ‘alright’.
But then I heard about colleagues being lumbered with five-figure tax bills just for doing their job. They mentioned terms such as annual allowance, lifetime allowance, tapering, threshold income and adjusted income.
Given that I am still in the early stages of my consultant life I’d assumed these were things I needn’t worry about. However, I decided to look into it in more detail, and what I discovered is extremely concerning. As it turns out, this is a massive problem even for consultants early in their career and it seems that many of us are in fact working for free!
In the last few weeks, many consultants may have received a brown envelope from the NHS Shared Business Services Authority, indicating potentially eye-watering Annual Allowance Charges. If like me you have stakes in both the 1995/2008 scheme and the 2015 scheme, you may receive two letters. On the back of these letters they indicate your pension growth over the last tax year. This value (across all pension schemes combined) cannot exceed the annual allowance of £40,000, or if tapering applies, a lower value down to a minimum of £10,000.
However, these statements don’t tell you how much tax is due. It doesn’t even tell you if you have a lower annual allowance and perhaps more worryingly, you don’t automatically get a statement if you haven’t exceeded the £40,000 annual allowance, even if you are personally limited to a lower annual allowance as a result of tapering. I do my own tax returns and have relatively simple financial affairs, so I presumed I could calculate my tax bill. After all it is just numbers, so how hard could it be?
After eight hours wading through old payslips, total reward statements, past tax returns – inputting this into an Excel spreadsheet whilst carefully referencing the guidance from HMRC, the gov.uk website, and the pensions part of the BMA website, it dawned on me that there were 60 different click-through boxes on various elements of pensions. It really is remarkably complex. I spoke to some colleagues and heard that even accountants sometimes couldn’t calculate this and were referring doctors to independent financial advisors, whilst independent financial advisors couldn’t help either and were referring doctors back to the accountants! In some cases doctors were having to retain the services of actuaries in an attempt to get an answer to ‘what does this mean for me?’.
I had a conversation with the BMA Pensions team. The complexity of the situation for those in a defined benefits pension scheme (predominantly public sector schemes like the NHS pension) is well recognised – it is almost as if the system had been deliberately designed to catch the unwary or those who are less dogged in pursuing the answer.
It turns out that to not get caught in the web of tapering annual allowance and unexpected tax bills I need to try to keep my ‘threshold income’ below £110,000 (that is total NHS pay, whether pensionable or not, plus any other income from any other source, less employee pension contributions and allowable expenses). If I exceed the threshold income, I need to keep my ‘adjusted income’ (factoring in pension growth and input and the employers’ pension contribution) below £150,000. If my adjusted income exceeds this value then the amount my pension pot can grow without incurring further tax charges (ie remain with the annual allowance) shrinks progressively. This is known as tapering, and my annual allowance reduces by £1 for every £2 my adjusted income (including employers’ pension contributions) exceeds £150,000. If I exceed my annual allowance, I will be taxed on the excess, usually at a rate of 45%.
It is extremely difficult to plan in advance in order to mitigate tax liability. As the Total Reward Statement available from the Electronic Staff Record doesn’t include pension growth within the glossy pie charts, it is a good idea to request a pensions statement from NHS Pensions, particularly if any changes in your work pattern or pay are on the horizon. This may include things such as applying for a CEA, being paid ‘back pay’, coming up to a salary increment or importantly, taking on additional PAs, doing Waiting List Initiatives or undertaking locum shifts to cover gaps. Indeed, the risk of this annual allowance charge may mean that you end up doing this work for free!
How could you possibly end up working for free by doing more work? Well, although you would be paid for the additional work, you will have to pay tax and National Insurance contributions on your earnings. This will reduce the take-home pay of this component to around 50% of the gross pay. However, above the £150,000 adjusted income threshold, the effect of tapering will reduce your annual allowance by 50% of the earnings you are paid above this threshold. Between the adjusted income of £150,000 (which includes the employers’ pension contribution so in effect equates to a total income of around £130,000), and the limit of tapering of £210,000, it is highly likely that consultants won’t see a significant increase in take-home pay by taking on additional work. Indeed you may incur additional expenses for doing this work, so may actually make a loss!
So, if there is a summary, it must be to recognise that this is hugely complex and extraordinarily difficult to calculate correctly. Seek advice from those who know about this – accountants, independent financial advisors, BMA Financial services – to manage any nasty surprises on the horizon.
Think long and hard before undertaking additional work – you may effectively be paying for the privilege of doing so. Should the annual allowance limit be reduced in the Budget on 29 October, or if the decision is made to increase the NHS pension accrual rate, the implications for consultants would be disastrous. In effect, these changes would more or less make it uneconomical for consultants to work more than 10 PAs and may force many other consultants into early retirement.
What is the BMA doing about this?
The BMA has been making the points raised in this blog to the Department of Health and Social Care. We have been clear that the current tax regime will effectively further reduce the consultant workforce in an NHS that is struggling with increasing numbers of consultant vacancies.
However, as you heard last week, the Government doesn’t see consultants as a priority and appears to have no hesitation in targeting consultants to help pay for increased funding in the NHS. Please help us to challenge the iniquity of this situation by completing the survey on pensions. This information is important to us so that we can demonstrate just how big a problem this is.
* The amount you contribute is based on your pensionable earnings (or whole-time equivalent if you work part time). There are currently seven contribution tiers ranging from 5% to 14.5%, with consultants falling into the 13.5% (pensionable earnings of £70,631.00 to £111,376.99) or 14.5% (£111,377.00 and over) brackets.
Add your voice by completing the BMA's new pensions survey
Phil de Warren-Penny is deputy co-chair for negotiations on the BMA consultants committee
Where can I find the Survey on Pensions?
Yes - a magnificent system we work in. 4 years ago the excitement of receiving national CEA tempered by the fact that the tax liability was greater than the award value. Now look forward to paying an entirely arbitrary tax bill of £20k per year on income I have not earned which will then be taxed again when I finally receive the pension.
It's criminal. I too was awarded CEAs which were paid at the same time as an increment in my salary leading to an additional tax charge of £60K- yes: 60K. I had no idea this was coming. The only way I could have done so was to watch my pension growth v annual allowance each year and then not applied for the CEAs. Even when I received the dreaded brown envelope I have had to go through two accountants and two financial advisors before I can find help. Even calculating how much the penalty is is a minefield- neither the HMRC nor the NHSBSA were any help whatsoever.
Good to see this sort of output. I hope consultants can look forward to seriously beefed-up pensions support from the BMA for their substantial subscriptions. As has been said before now, accountants, payroll and even IFAs don't know the rules. POI: Tiered contribution rates apply to all schemes, not just to CARE.
It is an absolute minefield and most people have no idea because they don't automatically receive the brown envelopes. There is absolutely no point in working hard and getting CEA awards - you will lose more in tax to be payable due to pension growth. I've now left the scheme - may as well spend the cash!
Even small increases in pay will put you over the 40K limit - as the value is X16 - so 3K increment or CEA = 3x16 ie. 48K growth just in the 1995 scheme. Then add to that, the increase in the 2015 scheme (which is essentially pension contribution + employer contribution) which for most will be over 20K in total. Very easy to go above the 40K. In the example above it is 68K ie 28 K over for which you will need to pay tax at 40% (unless you have unused annual allowance from previous 3 years - a big if). Take care. Ask for a pension statement so you are at least in possession of the info. I was blissfully unaware....and now have to pay 20K tax on money I have not actually received. My take home pay in the year in question increased by 300£ per month. Its remarkable really. Time to pack up and go somewhere more sensible.
Good Blog Phil . First time I have heard BMA be so vocal about some of these things.
The pension situation is toxic and will have major consequences for recruitment, retention and morale.
It would also be good to
a) Produce some guidance on what th consequences of leaving the scheme would be in terms of loss of death in service benefit and Tier 2 ill health benefits
b) Push for employers to give back employers contributions to consultants leaving the scheme (cost neutral)
c) Discuss with employers the option of consultants using pension Hokey-Cokey to contribute up to their own individual annual allowance and no more each year
As somebody who is being hit by the Annual Allowance and Lifetime Allowance I do wonder why I bother coming to work. However I do need a decent income in retirement so have decided to take the short term pain of Annual Allowance penalties of around £20000 over the last 3 years of my career leading up to 60 in order to reach my goals for a decent retirement income.
The biggest problem with the current debacle is the fact that you can never be sure you have calculated your tax due correctly - my advisers have introduced a rider on their advice indicating that they are not liable if it is disputed by HMRC and a penalty imposed - the current arrangements are hideously complex and completely inhumane.
We were all told that "Torys" are the low tax party where work will always pay - you are having a laugh! For high earners they have effectively reintroduced Supertaxes which they derided Labour governments in the 1970's for doing.
It is the single most demoralising thing I have encountered in my nearly 20 years as a consultant and is almost certainly going to lead to me retiring earlier than I would have done.
I am having to take out a further mortgage to pay my AA charge.
BMA please take ownership of this and do not out source to Chase Devore who may be expert but just want to make money from us for advice you should be able to give.
Worked part time for years, then when kids grew up went full time, taking on management roles and working full time. Yes, gained CEA points too, so yes yes have been caught masssivley by this. Initially told by my accountant I. had to pay £70 K but later adjusted down to K28- phew. After he obtained some advice from a financial adviser whom of course I had to pay as well. Got some reasonable advice from Chase de Vere for a free initial consultation, alerted me to back pay issue, CEA points awarded late had caused incorrect increased tax liability over one year. Instead of over two years. Penison had to be recalculated, this took months of waiting and had to overpay tax last year initially.
Over the year I became an expert on this. But, working it out in future is difficutl. . Best not to change your salary. Have much greyer hair. what an awful shock .Will have to remain full time now as actually will lose out if go part time as this payment assumes I will work full time. Definitely won’t take on extra sessions, extra paid roles and certainly no more CEA points. What a crazy system. Thanks to the government se hidden taxes Labour would probably tax us more.
Felt like I could complain to nobody - a very lonely process as nobody wants to talk about their earnings.
Apologies, being anonymous number 4 was not intentional - I didn't realise I had not signed on . Anonymous 12 makes a very good point; any flexible worker [especially CARE] who wants to return to fuller time later in their career could be totally flattened by this with the rules as they stand. In my opinion this is indirect gender discrimination and should be challenged. In relation to Anon 11 the blog's author will aver to a strenuous internal argument that the BMA was not serving consultant members adequately in relation to pensions. To that effect a motion was passed at Consultant Conference this year to re-establish the moth-balled Pension Committee. Please, please do the survey.
The link at the bottom of the article brings through to the pensions survey, But https://tinyurl.com/ybtt4m3p this will also link you through to it.
This is all down to the government not having the balls to increase top rate of tax, which would be too headline grabbing. Instead, it skims off the bottom by removing allowances, which makes it very difficult for anyone to figure out what's going on. I can't understand any of it. I'm planning to go part time in the short term to cut my salary, but possibly safer in the medium to long term, to leave the public sector altogether. NHS pension was the only thing holding me in the NHS, but now it's starting to look like a liability.