In Depth

What the pension tax changes mean for you

Government considering tax breaks for high earners in bid to tackle NHS staffing crisis

High earners are in line for pension tax breaks totalling hundreds of millions of pounds under plans designed to encourage NHS doctors to take on more hours.

The Treasury is set to offer the reliefs to people earning more than £110,000 in a bid to stop consultants from turning down extra work to avoid big tax bills, reports The Times. But “the tax break would apply to all workers, not just those in the health sector”, adds the Daily Mail.   

What are the current pension rules?

Reforms introduced by then chancellor George Osborne in 2016 reduced the amount of tax relief that some workers can claim on pensions contributions.

Tax relief means that you “get tax back or get it repaid in another way, like into a personal pension”, explains the gov.uk website.

The current pension tax rules allow relief on pension contributions of up to £40,000 each year (inclusive of tax relief). Any pension contributions above this limit are treated as income, and taxed accordingly.

However, if you earn an “adjusted income” of more than £150,000 a year, the sum for which you can claim pension tax relief starts to fall, tapering to £10,000 a year for anyone earning an adjusted income of more than £210,000.

Calculating your adjusted income - your total taxable income after certain tax reliefs, plus any employer pension contributions - is not straightforward, but in effect, anyone who earns more than £110,000 a year is at risk of seeing their annual allowance tapered away.

And that can mean a surprise tax bill, with doctors especially at risk. 

The problem for highly paid public sector workers is that the nature of their pensions - which, unlike most private sector pensions, are based on salary rather than contributions - makes it even trickier to calculate whether they will breach the annual allowance in any given year.

Some senior NHS consultants have been landed with unexpected tax bills of tens of thousands of pounds. In one case reported by The Times, a doctor who earned £111,684 was hit with a £40,000 tax bill and was forced to remortgage his house.

In a bid to avoid similar fates, many doctors have reduced their work hours, which has caused major problems for the health service, says ITV News.

What has the Government done already?

Ministers and officials have been floating a variety of solutions with medical leaders, amid lengthening NHS waits.

Last year, “ministers approved an emergency measure under which the NHS promised that any doctors hit by tax bills this winter would have their incomes topped up in retirement to what they would have been without the charge”, The Times reports.

But few doctors are increasing their hours, with the British Medical Association (BMA) dismissive of what many view as temporary solutions.

What are the proposed changes?

The Government is considering moving the cut-off point at which pension contributions count as earnings - and thereby inflate the contributor’s adjusted income - to £150,000.

The plan will only go ahead if the Government can be sure that NHS leaders and unions will accept the change as a lasting solution. But while some in the NHS are likely to accept the proposed change, the BMA wants the government to go further.

Unless ministers are prepared to introduce a highly divisive and controversial tax cut for doctors only, the pension tax rule change would apply to all high earners.

Many public sector employees who earn more than £110,000 say that they are only on high wages for a short time, and spend much of their careers making far less. The proposed new rules would allow such public sector workers to funnel thousands more into their pension pots.

However, the tax break currently under consideration would also be given to private sector workers, who are also affected by the pensions cap but don’t tend to be hit by surprise tax bills. Raising the threshold would allow these workers to save more and pay less tax.

And the reaction?

The proposed change has been met with caution by both doctors and financial experts.

Paul Johnson, director of the Institute for Fiscal Studies, said it was hard to predict how much the tax change would cost. “Combine that with very generous and inflexible pension schemes like those in the public sector and you create the sorts of problems doctors have experienced,” he said.

“Moving the threshold will mitigate but not remove the problem. A more fundamental review both of the tax system and public sector pensions would be welcome.”

Vishal Sharma, chair of the BMA’s Consultants Committee, said that the plan “does not fix the fundamental problem of doctors being forced to limit the work they do to prevent being hit with significant charges on their pensions, and many will still in effect be paying to go to work”.

Sharma also argued that the change would “punish the brightest and best doctors”, many of whom earn more than £150,000.

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