Doctors risk tax charge over pension confusion

Doctors could be hit with unexpected tax bills next month as many admit they do not understand the different pension savings limits and tax rules. In a recent survey carried out by Wesleyan, they found that 75% questioned did not understand the rules surrounding the annual and lifetime allowance limits on pension savings. In addition, some 31% did not know which section of the NHS Pension Scheme they were in, which could affect their retirement age, pension earnings accrual and retirement income.

This is very concerning as doctors, whose annual increase in pension benefits amounts to more than £40,000, will be liable for a large tax charge and must declare the information via a self-assessment tax return before January 31st. However, while HMRC encourages individuals to meet this deadline, it announced on January 25th that it would not charge a late filing penalty if the return is submitted online no later than February 28th. Please note, taxpayers are still obliged to pay their bill by the January deadline, with interest charged from February 1 on any outstanding liabilities.

Clinicians need to take the necessary steps ahead of the deadline to avoid any unwanted charges.

The Annual Allowance remains a complex component of defined benefit schemes such as the NHS Pension Scheme and it remains alarming that doctors are unaware of what this means for their tax obligations. Clinicians with complex tax affairs may face charges that will be hard to swallow resulting in many being forced to take on significant debt to settle the outstanding liability. The dual existence of the annual allowance and tapered annual allowance have created a raft of issues for senior NHS staff over the past couple of years.

The tapered annual allowance is a mechanism that gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits. The rules have forced many senior clinicians and other high earning public sector workers to either leave their pension scheme, cut down on their working hours or retire early to avoid punitive tax bills.

The Chancellor, in his 2020 Budget, increased the ‘adjusted income’ and ‘threshold income’ levels under the tapered annual allowance by £90,000 for the 2020-21 tax year (now £240,000). However, there are still doctors affected by the charge, including those who are taking on extra shifts due to the pandemic.

It is more important than ever that doctors remain aware of their tax liabilities and submit the necessary information before the self-assessment deadline at the end of January to avoid being penalised further which, in the current climate, would be extremely unfair considering the desperately important work they are involved in supporting the country’s health needs.

Although the government’s introduction of the 2019-20 annual allowance charge compensation scheme goes some way to alleviate the tax burden, doctors and senior clinicians still need to notify HMRC of any charges by January 31st and complete a subsequent ‘scheme pays’ election form by July 31st. Scheme pays allows members to settle charges of more than £2,000 through the pension fund without needing to find funds upfront. A complete overhaul of the annual allowance system would make NHS Pension Scheme members financial planning more accessible, but for the immediate future we must continue to support our hard-working clinicians to ensure that they do not fall foul of this complex process.

If you require any further information on this topic, please contact your Prosperis adviser on 01423 223640 or email us below.