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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
I was originally planning to work until I was 65. It is clear however that if I continue to work the Government will try to find more and more ways to avoid paying the pension that was promised when I signed up to work for the NHS. This means that it is better to retire earlier. Therefore, as a direct result of the constant changes to pensions, I will now retire at 59 [as I can in the 1995 scheme] and cut my hours down to just 6 sessions per week. That will give me more time to do what I want to do instead of work.
The question then remains about how long I continue to work part time: I have observed that many colleagues who have taken early part-time retirement decide that they prefer to completely give up work not long after they gain their partial freedom.
This of course does mean that the NHS loses lots of valuable experience but perhaps those of us in the position where early retirement is possible should be grateful to the Government for proving by the annual and lifetime allowances that a good work:life balance is essential, thus encouraging us to quit...
I agree. I have just about gotten over the shock of a 15K tax bill (in total in 2017-18, I will have paid 60K tax on a taxable income of 130K - thats 45% of all my earnings gone in tax).
I have left the pension scheme. I will cut back sessions, enjoy my life a bit more when I am still fit and well. Not willing to give up my life and wellbeing for this mugs game. Oh yes, was also considering working until 65 -no chance. I will definitely retire at 60.
Wish I'd read this article sooner - I've just invested a lot of time and money in reaching the same conclusions. BTW if you ask for a pension statement from the NHSBSA the lead time is 3 months - so absolutely useless for this year's return. Also they won't send these annually and it takes a while to get the numbers from HMRC etc so virtually no chance of ever getting a statement in time for doing your tax return. As suggested, you need a very competent (and therefore expensive) accountant to work through this pension issue and EVERY Cons or GP needs to address their annual +/- lifetime allowance this year as you only have 3 years of back dated allowance and the tax changes were introduced 3 years ago. You need to calculate allowance you can carry forward for future years as well. Total stealth tax that will devastate the NHS.
I have a spreadsheet that does all the What-if's scenarios and I have worked out even if I opted out of the pension scheme, I am still hit with an AA charge, simply because I have moved to the next increment. HMRC's decision to move the Pension Input Period from 31 March to 5 April did not help either. The only way I am going to escape the charge is to take unpaid leave every year between January to March.
Great blog. Sadly I gave a talk to my fellow consultants in 2016 that this was going to happen. I left the NHS pension in January 18 after a tax bill fortunately of only £4000. Don't ask me how I calculated it as it took a similar length of time. I think Einstein would struggle. Clearly I left the scheme too late as the statements or brown envelopes come too late.
I will rejoin the pension in April 19 when I will have the benefit of 2 years allowance. The penalty is no death in service benefits for the time that I am out - fingers crossed. I already have enough life insurance so should be ok.
A number of comments:
Neither HMRC nor the Pensions Agency could offer help. Pension advisor told me I understood it better than him.
I am curious as to the legality of this system in which we get taxed on future benefits. If I die tomorrow then that perceived benefit for which I paid £4000 last year no longer exists so my estate is entitled to a refund?
Agree, this actively discourages us from additional sessions. However I am also an army reservist (with no private practice) so I am further penalised with this income impacting on my annual allowance.
Finally, I bought added years to retire at 60. This now works against me having accelerated me to the lifetime allowance also. Double whammy.
Rest assured I will exit the NHS at the earliest financially viable moment I can (?58-60).
What I am finding is that some of the Consultants being hit hardest are actually those in the first few years post qualification.
While many senior Consultants are facing huge tax bills, they often don't have anything like the financial commitments of younger Members with mortgages and a young family to support. It's the rapid escalation of pay that causes these tax problems so those who are often least able to cope are amongst those being hit hardest. Scheme Pays is the only practical solution for some, but for others the longer term answer seems to be to opt out entirely.
Hardly an incentive!