It seems even the brightest of us have a tendency to file confusing tax bills in drawers for “later”, fooling ourselves that the problem will go away. David King, a partner in A.S.K. Wealth Management, says he has been seeing a number of higher paid NHS consultants who have been hit by unexpected tax bills thanks to pension rules that came into force in 2015.

At that time the government decided that those earning in excess of an adjusted income of £150,000 a year would have their annual tax allowance cut by £1 for every £2 earned over the £150,000 limit. At £210,000 and above the tax free allowance on pension contributions reduces to a flat £10,000 a year.

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Adjusted income is pay minus pension contributions plus Pension Input Amount- a figure calculated by the SPPA after the year end. The problem for higher earners in the NHS is that pay is related to hours worked and it is very difficult to tell in advance what the year’s pension contributions are going to amount to.

In a defined contribution pension plan it is easy to see what the contribution is, but with the NHS scheme the precise contribution can only be arrived at retrospectively.

When the sums are finally done, consultants frequently find themselves with large unexpected tax bills for past years’ work. The BBC reported in July this year that waiting lists for routine surgeries in England had surged by up to 50% as senior doctors have started declining extra shifts in an effort to avoid nasty tax surprises.

The problem for doctors is that all their income is taken into account in the annual allowance calculation, including private and non-pensionable work.

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Even doctors who earn only just above £110,000 can receive significant tax bills. “This issue is an entirely unexpected and unforeseen consequence of the Government’s decision, four years ago, to try to extract more tax from the top five percent of tax payers,” King points out. “They’ve been receiving calculations from the NHS indicating that they may have gone over their annual allowance threshold and incurred tax. Many doctors simply filed those notes since they couldn’t figure out what to do about it” he says.

Part of the problem is that the accountants who act for medical consultants are prevented by law from providing financial advice. The accountant can confirm that they have a tax bill to pay, but he or she cannot tell them what to do about it.

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That is the job of a qualified financial adviser.

However, as King points out, there are actually not that many IFAs who have much experience of advising senior NHS staff, so qualified advice is very hard to come by. King himself can draw on over twenty years experience as a former consultant to the BMA, but that kind of experience among IFAs is rare. “I have been dealing with the medical profession ever since my days as a financial consultant with the BMA and understand the complexities of NHS pay and pensions structures very well,” he notes. “This enables us to find solutions that fit the individual circumstances of each of our NHS clients,” he says.

King points out that both the Government and senior figures in the NHS realise that there is a problem with respect to senior staff pensions. However, the government cannot just come out and make an exception for NHS consultants, since other professions, such as civil servants, would quite justifiably want the same treatment.

“One of the answers the Government suggested was for consultants to cut their pension contributions in half, with the employer’s contribution being similarly reduced,” he says.

That would take many consultants out of the tax trap, but it would also mean cutting their pay and remuneration package – not exactly an attractive solution.

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One of the exacerbating factors affecting NHS pensions for high earners is that the whole NHS pension scheme is an unfunded scheme. There is no pot of money invested to pay benefits. The benefits being paid to those in retirement all come out of present contributions by employers and scheme members. If the numbers of consultants paying into an NHS Trust’s scheme dwindle, the government has to raise the pension contribution perhaps from both employer and employee.

This in turn creates more tax problems for the consultants since higher contributions are more likely to push them over the £40,000 contributions limit. “The problems vary from consultant to consultant. We have two clients who are a husband and wife, both anaesthetists. Both earn similar amounts. The husband does not have an annual growth in contributions problem, but he has a problem with his lifetime pension allowance, which is £1.055 million. Anything over this will incur penal tax rates. His wife doesn’t have a lifetime allowance problem but she has an annual contributions problem. So in the same family there are two very different tax problems,” he explains.

"Still another problem is illustrated by the fact that his wife’s sister, also an NHS consultant, has both problems! She bought extra years’ worth of pension and that is now generating a problem.“Doctors were told 20 years ago that they would not have enough qualifying years if they retired at 60."

"Advisers would tell them that they are four years short of qualifying for a full pension. Now the retirement age has gone up to 67, and the rate at which the pension grows has increased. So again, they run into problems,” King says.

One solution could be for those in their 50s to opt to come out of the NHS pension scheme, but that requires very detailed planning and specialist financial advice. “There is no “one-size-fits-all” solution to the NHS pension tax problem.

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Our recommendation is that senior NHS staff need to seek qualified advice as early as possible. This is not a problem that will go away,” King concludes.

Higher earners should be aware of their limits.

NHS employees paying into the NHS pension scheme are subject to the same annual allowance and lifetime allowance limit as everyone else. The annual allowance limit is the amount of pensions savings an individual can make in a year without incurring a tax charge. That limit has been set at £40,000 or 100% of salary, whichever is the lower, since 6 April 2014.

However, for higher earners, this allowance is tapered. The government’s case is that higher earners are better placed to look after their own retirement, so do not need the same amount of “help” from the government to save for their old age. As a result, the government withdraws tax relief in a tapered way.

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For every £2 of adjusted income above a threshold level of £150,000 of annual income earnings, the annual £40,000 allowance is reduced by £1. The maximum reduction imposed by government is £30,000. So for anyone who earns more than £210,000 a year, the annual allowance reduces to £10,000.

The Lifetime Allowance is the amount of pension benefits which an individual can have before a further tax is applied. This limit has been greatly reduced over the years and is at present £1,055,000. It is now subject to increases in CPI.

A longer career as an NHS Consultant may well lead to higher Lifetime Allowance tax.

It pays to invest in the future ... now

THE NHS has had three Pension Schemes, the 1995 Section, the 2008 Section and the 2015 Section. The first two are final salary schemes, the 2015 Scheme doesn’t use the final salary as the key for the pension benefits calculation, but instead uses a less generous formula based on career average earnings.

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One result of this is that many senior medical staff are trapped in a “twilight zone” between, on the one hand the 1995 and 2008 Schemes, and the 2015 Scheme.

Benefits will have built up in the older schemes which can be taken at age 60. From 2015, or later, however, consultants and doctors may also be members of the new scheme which accrues benefits more quickly but cannot normally be accessed until age 67.

Contributions into the new scheme will in many cases breach the Lifetime Allowance limit, incurring tax on anything above this year’s level of £1,055,000.

One of the solutions available to this tax dilemma, could be to continue to pay into the new scheme (if Annual Allowance limits permit!) and for the member to opt to take the new (age 67 scheme) benefits early.

This will incur a penalty but can – if the calculations are done properly - reduce the pot below the Lifetime Allowance tax level. Finding the sweet spot of retirement between benefits at age 60 and benefits at age 67, can be attained by careful planning and use of the Annual Allowance and Lifetime Allowance limits.

It is important to realise that people on similar salaries may not have the same retirement, family or investment goals, so individual advice is critical. Particular situations can differ greatly due to age, marital status and whether there is a desire to work on or retire.

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Where leaving the NHS Scheme is the best option, alternative vehicles such as ISA, or the Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT) schemes can be used to build up benefits. These last two provide tax relief on earnings but are of a higher risk. EIS is a tax relief scheme provided by the government to encourage investment into startups and early-stage businesses.

Clearly these kinds of investment carry a high risk of failure, which could wipe out the entire investment, so potential investors need to be properly advised.

In addition to specific investments there are managed EIS funds or portfolio services that look to diversify the risk across a number of different investment opportunities.

Tax reliefs on EIS come as both income tax relief of 30% of the investment, plus if the investment is held for at least three years, all gains accruing are exempt from Capital Gains Tax.

Since capital gains tax relief on the growth in a pension fund is a key benefit provided by saving in a pension fund, this makes an EIS an attractive – if higher risk – alternative. In 2018 over £745 million was invested in Venture Capital Trusts.

VCTS are akin to investment trusts. They are managed by fund managers who chose a basket of unquoted and AIM listed companies, and investors by shares in the Trust, not the underlying companies. They offer up to 30% income tax relieve, like the EIS, and dividends are tax free. Plus there is no CGT to pay on VCT Gains.

Some of these investments can be in the Medical, Biotech or Pharma fields, which may suit the investment philosophy of someone in the medical profession.

Again, none of the preceding investments should be attempted without proper advice.

For more informatiomn you can contact  Dave King Dip PFS Cert CII(MP), Partner at A.S.K.Wealth Management  LLP