- An influential committee of MPs has today branded pension tax rules which are exacerbating pressures on the NHS a “national scandal” (Workforce: recruitment, training and retention in health and social care (parliament.uk))
- Complex pension tax taper rules for high earners are forcing huge numbers of senior doctors into retirement
- A survey conducted by the Royal College of Surgeons of England found over two-thirds (69%) of respondents had reduced working hours as a direct result of pension tax rules
- A separate survey by the Royal College of Physicians in 2019 found 50% of 2,800 doctors surveyed had retired earlier than planned, with most citing pension concerns as the reason
- Pension tax taper kicks in where someone has ‘adjusted income’ above £240,000 and ‘threshold income’ above £200,000 – but senior doctors working overtime are unlikely to know for certain what their annual hours or earnings will be
- The taper reduces your available annual allowance by £1 for every £2 of adjusted income above £240,000, to a minimum of £4,000 for those with adjusted income above £312,000
- Government urged to consider the obvious solution – scrapping the annual allowance taper altogether
Tom Selby, head of retirement policy at AJ Bell, comments:
“The UK’s pension tax system has become a quagmire of complexity, leaving savers befuddled as to what they can contribute each year and creating hugely damaging unintended consequences for the NHS.
“It is, frankly, absolutely ludicrous that pension tax rules are exacerbating the challenges facing a health system already creaking under the pressure of COVID-related backlogs.
“When pensions are increasing the risk of people not receiving the treatment they need something simply has to change.
“The select committee has urged the Government to look at solutions that specifically address problems in the NHS pension scheme. However, it would make far more sense to scrap the annual allowance taper altogether.
“This would, at a stroke, remove any uncertainty facing senior doctors about the impact working extra hours would have on their pension arrangements.
“It would also make the pension tax system simpler to navigate for all, which has to be a good thing as various Government initiatives aim to drive greater levels of engagement among savers.”
How the pension tax taper works
The annual allowance for pension contributions is set at £40,000. However, for very high earners this allowance is ‘tapered’ depending on their annual earnings.
The pension tax taper kicks in when someone has:
- ‘Threshold’ income above £200,000
- ‘Adjusted’ income above £240,000
Threshold income is broadly taxable income (so earnings plus investment income) minus personal pension contributions.
Adjusted income is taxable income (again earnings and investment income) plus employer contributions.
Threshold income also needs to include any salary sacrifice or flexible earnings arrangements set up after 8 July 2015, while lump sum death benefits are deducted to reach both income measures.
Where the taper is applied, the annual allowance falls by £1 for every £2 of adjusted income above £240,000. The minimum annual allowance under the taper is £4,000 (for those with adjusted income of £312,000 or more).
A more detailed guide to the taper is available here: AJBYI_Guide_to_annual_allowance_tapering.pdf (youinvest.co.uk)
