High earning NHS consultants, GPs and senior staff face higher tax bills due to pension tax changes

6 Aug 2014

As many NHS Consultants, GPs and senior staff in the NHS pension scheme receive their pension savings statements over the next few months, they will need to understand the impact of new tax limits imposed by recent HMRC changes.

Reductions in pension taxation limits from April this year mean that NHS consultants, doctors and senior nurses may opt to retire early in order to mitigate tax charges.

NHS employers need to address potential workforce issues. Employees may feel disaffected as they could view the changes as fundamentally altering one of their key employee benefits and many will only become aware in the next three months when they receive their pension savings statements or when they request a pensions estimate.

From 6 April 2014, the Lifetime Allowance, which is the maximum amount of pension savings that benefits from tax relief over a person’s lifetime, reduced from £1.5m to £1.25m. The Annual Allowance also reduced from £50,000 to £40,000, being the annual limit that can be made in any one year and receive full tax enhancements.

While these figures appear substantial, in reality many NHS workers could be affected.  As a result, anyone earning from £94,000 with a full career in the NHS may breach their limits. But the changes don’t just affect the highest earners, such as GPs, senior consultants or surgeons; even those earning over £45,000 a year could breach the annual allowance if they have over 20 years’ service and receive a significant promotion.

We would advise NHS employers to identify anyone that might be affected and inform them of the options available to them and the action they need to take. NHS Pension Scheme members who are likely to breach the limits should consider when they plan to retire, the amount of cash they plan to take, how their pay might increase in future, further pensions savings from other employers, dependants’ benefits and options for flexible working.

Current members also need to consider whether they would like to apply for Individual Protection from August 2014 until April 2017 to protect their current Lifetime Allowance.

In reality, most people now work for several employers in their working careers, both public sector and private and will therefore have both what are known as Defined Contribution (DC) and Defined Benefit (DB) schemes. DC schemes are ones where the employee and often the employer put in a specified amount, which is invested, allowing the member to buy a pension when they retire.

Importantly, if you have worked for a number of employers it’s the sum of all the pension pots accumulated that count. However, the calculation is less obvious for Defined Benefit scheme members as most won’t appreciate the notional value of their final salary pension, which the HMRC calculates to be 16 times the pension for annual allowance purposes and 20 times the annual pension for lifetime allowance purposes, plus any retirement lump sum.

The same issue applies to the reduction in the annual allowance to £40,000. Most people will be aware if they are likely to be contributing such a large amount in a single year, but it’s easy to get it wrong, especially if you work for more than two employers, or your work has a performance basis which also qualifies for pension benefits.

These issues are complex and I would advise contacting your employer if you think you may be affected. MyCSP offers a service to employers wishing to provide support to affected members, we can be contacted at training@mycsp.co.uk.  It is important that NHS scheme members are aware of the upcoming changes in order to make informed choices about their options and ensure the correct HMRC reporting procedures are followed.

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