High earning NHS employees such as consultants and GPs are exposed to high pension tax charges which have lead to reduced final pension entitlements and a reduction in take home pay.
The scheme is rigid and based on an individuals earnings. The only solution to reduce the exposure to tax is to work less.
The tax charges come about from:
- Lifetime allowance charge, if a total value of a member pension on retirement goes over £1.055m there is a tax charge.
- Annual allowance charge, any extra rights under a pension scheme in a tax year by more than the annual allowance (£40k and £10k over earnings of £210k) is taxed at the marginal rate of tax (45%).
Ideas for change
Members can choose a level of contribution before the start of the tax year. Therefore allowing them to not expose themselves to the tax charges but still continue to contribute to the scheme.
Also, if by the end of the year members know their level of earnings for the year an adjustment can be made to increase their contribution levels.
When members pay a reduced amount, employers contributions will also be reduced. Employers will be open to pay any reduction in contribution to the member as taxable earnings during the year.
A one-off increase in earnings could trigger a extra exposure to the annual allowance charge. This boost in earnings might be smoothed out by phasing in the “pensionability” of the rise over a three year period: in year one, only 50% of the increase might be counted, and 75% in year two, with 100% being considered in the third year.
This approach is found to be of benefit to high earners nearer the end of their careers, while more junior clinicians might be at a disadvantage.
Death in service insurance, survivors pensions and ill health retirement cover will still be paid for at all levels.
Who will be affected?
To qualify for flexible accrual an individual must both:
- be employed in a role that requires registration with an appropriate healthcare regulatory body; and
- demonstrate a reasonable expectation that their prospective NHS commitments would result in pension growth exceeding their annual allowance.
Kala Atkinson is a family owned accountancy practice in East London. We have years of experience dealing with taxation of the UK medical industry.
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