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Halving pension contributions 'not enough' to avoid tax charges

Government's plans to halve pension contributions for high earning GPs are 'not enough' to tackle huge tax charges, accountants have warned. 

The Government yesterday announced a review to make pensions 'more flexible' for GPs in a bid to address retention issues

Under new plans, high earning GPs, consultants and other senior clinicians will benefit from the '50:50' section, which would see them reduce their normal contributions towards their pension pot by half and receive half the amount of their pension in return. 

The Government argued this option will allow doctors to build up their pension more slowly 'by making steadier contributions towards their pension, without facing regular significant tax charges'.

But accountants have warned the measure is in effect a 'pay cut' and will not suffice to address existing issues around the tapered annual allowance. 

James Gransby, partner at accountancy firm MHA MacIntyre Hudson, said: 'The 50:50 option was arguably already able to be achieved by GPs through opting in and out of the scheme - referred to as yo-yo or hokey cokey - the issue with this being that in most circumstances 50% would not be enough of a cut to avoid the tax charges, and also administrative issues at a practical level.'

Macarthur Gordon specialist financial planner Paul Gordon said the adjustment might even impact GPs further. 

He said: 'The 50/50 adjustment is a step that will still leave many with tax charges, which for some could actually worsen as they are further impacted by increased taxable income when calculating the threshold income.

'The limited good news is that at least it will lessen the need to continually chase Primary Care Services England for those looking to cease contributions or leave and return.'

Under the current NHS pension scheme, the highest earning GPs have to pay 14.5% in contributions, but an annual pension tax allowance worth £40,000 limits the amount of money that can go into the pot each year without facing significant tax penalties. 

The annual allowance starts to reduce from this level for high-earners with total income over £150,000 per year. The minimum tapered annual allowance is £10,000, which only applies to those who earn more than £210,000. 

Only those who have built up more than £40,000 in contributions in their NHS pension in a year and/or have an adjusted income of over £150,000 will be affected by the new 50:50 proposal. 

Tilney chartered financial planner Gary Smith said that this option could 'defer members' eventual retirement date'.

He said: 'Whilst it is a welcome solution to the growing problem, it still effectively means that active members of the NHS scheme who take this option are reducing their pension accrual further, having already seen the benefits provided reduced by the introduction of the 2015 version of the scheme.

'High earners are going to have to crunch the numbers to see if they would be better off under the 50:50 option or, remaining an active member of the scheme and ask the scheme to pay the annual allowance tax charge, with a corresponding deduction to their pension when they retire.

'By opting for the 50:50 option it could defer members’ eventual retirement date, as they might not build up sufficient pension benefits for their currently anticipated retirement age.'

Director of public policy at financial advisor LEBC Group, Kay Ingram, said: 'The Government’s proposal to alter the NHS pension scheme to help clinicians avoid large tax charges, when undertaking extra work, treats the symptoms but not the cause of the damaging tapered tax relief regime for pension savings.

'Those affected will therefore end up with slower pension accrual than colleagues who decline extra work. This is in effect a pay cut, only partly compensated by lower personal contributions being required. They will need to take advice to understand the tax implications just as they do now.

'If the Government wish to help NHS staff and others avoid this conundrum they should scrap the tapered allowance forthwith.'

Readers' comments (17)

  • Peter Swinyard

    Did you understand all that??? Me neither! That's why we need to employ the services of Paul Gordon or Sean O'Connell (usual disclaimers)

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  • Message is, there is a limit on what one can earn in the UK. If you work harder you get less pay per hour than someone who works less and in some cases you get less pay! The pension is a trap. They want your investment to grow more slowly! Which smart investor would agree to this? They have also made clinical practice so risky that if you get done for Gross Negligence Manslaughter, ALL your previous contributions before you were charged gets confiscated. Fair? The UK is now really toxic to practice in. I would leave at the drop of a hat if not for family.

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  • Yes I understand it. Robert Maxwell faced prison for defrauding his employees and stealing from the pension pot. The government have made it their policy.

    Can we arrange a boat trip for them?

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  • The tories have got their own cruise on the good ship brexit.I think as a political force they are going to do a Robert Maxwell jumping of this.

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  • The only way to prosper financially nowadays is to do limited NHS work and try to live off this income.Then look at where you can easily earn private medical income, which unfortunately may not be standard General Practice. Then form a Limited company, or possibly an LLP for the new private income.Try not to take dividends from the company to let the profits build. After a few years liquidate the company, pay the tax due, which will be a lot lower, to release the profits. Then invest this money, although it is difficult to find high yields with minimal risk. Then continue the cycle forming another company.

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  • The whole thing is crazy complex. Most younger docs have no clue about it. I wonder if it is deliberately being made inaccessible bar those with special interest?

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  • It is not just the high earners. I earned 60k this year but had a 200k Tax Bill because my pension pot increased by 500k. The reasons are complex and related to the difference between officer and GP pensions. But a common way others can get stung is for their pay to go up due to a promotion or pay/income rise. The 40k allowance is not about your contributions but about your pension pot value.

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  • contributions are far higher than this article suggests as GP partners pay their own employers and employees contribution. It's more like 28%

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  • 'Only those who have built up more than £40,000 in contributions in their NHS pension in a year and/or have an adjusted income of over £150,000 will be affected by the new 50:50 proposal'
    ....what ??????
    Surely that is not right. I thought the point was the 50:50 scheme would be open to anyone at any stage..? Please somebody correct me if I have misunderstood this....

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  • Depends really on how much the governments of the day value experience within the NHS. Surely the simple thing to do if they do is to raise the thresholds? - Job done and workforce keeps working... Opting out of the pension contributions just pushes your earnings up which are taxed but at least you know where you are with this.

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