Pension tax bills: A prescription for doctors

Stethoscope and money
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Simon Nicol explains why some senior doctors are refusing to work extra shifts for fear of facing huge pension-related tax bills, while others are retiring early for the same reason.

Although the annual allowance capping rules, which are causing a lot of this anguish, have been around since 2016/17 many members of defined benefit schemes (final salary pensions) are only now realising the tax consequences. In some cases, it is too late to take appropriate action.

What is the issue?

The problem for doctors, and indeed all members of defined benefit schemes such as the NHS Scheme, is that they have little control over how much their pension benefits increase in any given year. If a substantial pensionable pay increase is received, benefits will also increase substantially, especially for long-serving members of the 1995/2008 Scheme.

Tax charges for exceeding the annual allowance (AA) have been exacerbated by the tapered annual allowance (TAA). This has been in force since 2016/17 and is designed to restrict pension tax relief for high earners.

Cliff edge

The issue with the TAA is the two-stage testing process. The first ‘threshold income’ test measures all taxable income, from all sources, less individual member pension contributions. If this is below £110,000 no further TAA testing takes place and the £40,000 AA is retained.

If, however, the £110,000 threshold is breached then the deemed value of the pension accrual is added to the income figure to test for ‘adjusted income’. If that combined figure exceeds £150,000 the AA will be tapered.

This can give rise to the cliff edge anomaly. As an example, if a doctor with 30 years’ service in the 1995/2008 Scheme receives a £10,000 pensionable pay increase this could give rise to a pension input amount (PIA), that is the deemed value of the pension increase, of around £70,000.

If that doctor’s income under the threshold test is £109,000, the full £40,000 AA is retained and tax on £30,000 excess PIA is due (£70,000 - £40,000).

If that doctor’s income is £111,000, the deemed income for the ‘adjusted income test’ is £181,000 (£111,000 plus £70,000 PIA). The AA will be tapered by £1 for every £2 excess, giving rise to a reduced AA of £24,500, meaning tax is now due on an excess of £45,500.

This, according to The British Medical Association, provides sufficient incentive for some doctors to refuse overtime shifts in an attempt to stay below £110,000 income.

What can be done?

In reality, not many pension scheme members will be in the position illustrated above as it requires a combination of a big pension increase and income close to £110,000 in the same tax year.

However, for those in this situation, keeping total income under the threshold will clearly be helpful. Conventional methods of reducing taxable income can be used, such as charitable donations made under gift aid.

It may also be possible to make an additional personal pension contribution to bring taxable income below the threshold. However, this is something of a double-edged sword as any further contributions will exacerbate the AA excess, giving rise to a further tax charge which the member will likely have to pay themselves. However, a small pension contribution, if it is sufficient to bring income down below the threshold, may be worth it.

Some deft timing will be required, any action to avoid breaching the £110,000 will usually need to be taken before the tax year has ended and often when final income figures may be unclear.

Pain relief

Two additional rules can ease the pain:

Carry forward of allowances

Pension members can look back three tax years preceding the current year and add to the current year’s AA any unused AA from those earlier tax years. This is very useful and in many cases will eliminate tax bills. Someone just hitting the threshold for the first time may well have been entitled to full AA for the previous three tax years and will not have used up that full entitlement.

Scheme pays

The main saving grace is that the tax charge does not have to be paid by the pension scheme member directly. He or she can request the pension scheme should pay the tax charge. This is known as ‘scheme pays’.

It works by creating a notional debt account of the tax paid to which interest is added, currently at 2.4% above CPI. At retirement, a factor is used to convert the debt into a pension reduction.

Scheme pays will often be an attractive option; primarily to avoid having to find the money immediately, and for most that is enough. If the member unfortunately dies before retirement or early thereafter, the tax charge may never be repaid. It can also assist those breaching the Lifetime Allowance by reducing the value of the pension for that test.

The principle of scheme pays is relatively simple but unfortunately, the detail of the tax payment timings is not so. Applications for 2017/18 scheme pays must be made to the NHS scheme by 31 July 2019. However, there may be some elements of the tax that are technically due by 31 January 2019 for the 2017/18 tax year. Further details are found on the NHS pensions site.

Don’t check out

One action that is unlikely to be in anyone’s interests is to leave the pension scheme altogether. This leads not only to a loss of future pension benefits but also to a loss of associated employment benefits.


Tax treatment depends on individual circumstances and may be subject to change in future. The value of all investments can go up as well as down. Opinions, interpretations and conclusions expressed in this article represent our judgment as of this date and are subject to change.

Furthermore, the content is not intended to be relied upon as a forecast, research, investment advice or tax advice, and is not a recommendation, offer or a solicitation to buy or sell any securities or to adopt any investment strategy.

This article is issued by Thomas Miller Wealth Management Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155). It is a company registered in England, number 08284862.

About Simon Nicol

Simon Nicol

Simon joined Thomas Miller Investment in September 2016 from Broadstone Corporate Benefits Ltd where he worked for 11 years, latterly as Pension Director for the Executive Services team.

Simon has over 30 years’ experience in the pension industry and can draw on a wealth of experience and knowledge. He advises private clients as well as corporate bodies on all aspects of pensions planning particularly in recent times on the tax implications to senior executives of the latest pension legislation.

He has also taken a particular interest in the planning possibilities with pensions for those approaching retirement under the recent ‘pension freedom’ rules. 

Simon frequently comments on industry matters in the press as well as providing technical papers and presentations for clients and other financial service professionals.


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15th Apr 2019 10:22

My heart bleeds for the "poor" doctors - what a terrible position to be in ! .

Thanks (1)
15th Apr 2019 13:24

I'm more worried about patients. I recently met two medics, a consultant anaesthetist and a specialist intensive care nurse. Both took early retirement for exactly this reason - that if they had continued working they would have been penalised. They were quite categoric about it, it was not in their interest to carry on. They both regretted cutting their careers short (as they saw it) but they had this huge incentive to walk away taking all their experience with them. They are aware that their hospital is losing many of its most experienced people for exactly this reason.

Thanks (4)
By ClaireB
15th Apr 2019 15:50

It's not just doctors - the armed forces are also affected, especially when promoted, and they don't have the luxury of refusing shifts or working extra hours to afford the tax charge.

Thanks (0)
16th Apr 2019 16:23

my diamond shoes are too tight etc etc

Perhaps we pay them too much if retiring early on a pension most people couldn't even dream of is their biggest source of anguish!

Thanks (0)
By HarryB
17th Apr 2019 16:15

'Conventional methods of reducing taxable income can be used, such as charitable donations made under gift aid.'

Thanks for the article, but if I could just correct the above statement. It is a common misconception amongst tax advisers and IFAs that Gift Aid can reduce the Threshold Income, but this is not the case.
The legislation for this particular test does not allow a deduction for Gift Aid, but DOES for other charitable gifts, such as gifts of shares and property.

Thanks (0)
17th Apr 2019 19:27

I agree with Harry B, no adjustment is available for gift aid. I act for a lot of GPs and the main problem they have is that they are reliant on NHS Pensions to provide the calculation of growth but due to failings at Capita, who process the GP pension payments, information is often not available on time, is missing or is incorrect. All this uncertainty is unfortunately causing many GPs to leave the pension scheme, retire early or reduce their working hours at a time when the government is trying to recruit more doctors.

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to janejordan
18th Apr 2019 21:34

I'm glad to have some confirmation that there is a real problem in the NHS which has nothing whatsoever to do with medics being overpaid and is caused entirely by an incompetent government and civil service whose decisions increasingly generate unintended consequences. I am infuriated by snide remarks which suggest we should be jealous of medics receiving good compensation. My concern is that we are providing incentives for experienced people to leave the profession early. If we penalise people for remaining in their role, and give them an incentive to leave, why would we expect the outcome to be any different from the unfolding disaster in the NHS which we are witnessing now? If a medic with 30 years' valuable experience leaves 10 years early how long will it take to replace that level of experience?

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By HarryB
to janejordan
21st Apr 2019 09:11

Thanks Janejordan. I act for lots of NHS consultants; pensions are an issue! I’m guessing it’s even more complicated for GPs. How do you do the growth calculations without payslips??

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to HarryB
23rd Apr 2019 11:51

You do need the payslips for employment posts, or failing that, you will need to request a pension savings statement from NHS Pensions. These should normally be available within 6 months of the end of the tax year for employed consultants.

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By HarryB
to janejordan
23rd Apr 2019 14:39

Sorry - I wasn't clear with that last comment! Its easier for me with the consultants because they have payslips - I was wondering how you cope with GPs and calculating pension growth without any payslips... do you calculate/project or just wait for AAPSS??

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