Pensions tax hike would be disaster

By Edie Bourne

Doctors have been alarmed to hear reports of new pension tax changes being discussed by the Treasury to help pay for the country’s response to the Covid-19 pandemic. 

Measures believed to be under consideration include introducing a flat rate of tax relief and lowering the lifetime allowance. 

The lifetime allowance was frozen in this year’s Spring Budget at £1,073,100, but a report by The Daily Telegraph suggests this could drop to just £800,000.

The lifetime allowance is the total amount which can be saved into a pension free of tax. 

Pension savings above the rate are taxed at 55% if taken out as a lump sum or 25% if paid in any other way.

Patrick Convey, technical director for specialist financial advisers Cavendish Medical, explained: ‘We need to be cautious because rumours of pension tax changes circulate every year – although normally this happens before a major fiscal review such as the Budget or Autumn Statement. 

‘However, if any of these changes are put in place, it will have serious consequences for doctors, particularly those tied into the NHS pension. 

‘The lifetime allowance limit was £1.8m in 2011-12 and each time it has been reduced, it has meant more doctors facing harsh tax bills. If this reduction is true, a drop to £800K would be extremely detrimental to many NHS pension savers.’

Increasing contribution

In addition, increasing the flat rate of tax relief would effectively increase doctors’ net contributions to the pension scheme. 

Mr Convey said: ‘Many senior doctors contribute 14.5% of pensionable salary to their NHS pension but get tax relief at 40 or 45%. This results in a net contribution figure of 8.7% for 40% taxpayers or 7.98% for 45% taxpayers. 

‘If a flat rate of tax relief was introduced at, for example, 30%, this would result in a net contribution figure of 10.15%, regardless of tax rate. For a doctor with a salary of £120,000 a year, this would cost an extra £1,740 annually as a 40% taxpayer or £2,604 per annum as a 45% taxpayer. 

‘The problems caused by the complexities of pension tax are fuelling a workforce crisis among senior medical staff. 

‘These changes will undoubtedly cause more concern for those in defined benefit schemes than any other pension and will present substantial problems. 

‘We await to hear more definite outcomes of this latest pension shake-up, but if the measures go ahead, we will see more senior doctors leaving the profession at a time when the NHS desperately needs its staff.’