NHS Pension Scheme and doctors

Over the past week or so there is growing media reporting on the impact of the pensions Annual Allowance, and in particular, the Tapered Annual Allowance on doctors.[1] The reports are quite troubling. Many doctors reducing hours to avoid punitive tax charges, leaving health services critically understaffed. Enormous tax charges that leave doctors with difficult financial choices.

So why is this hitting doctors? What is special about them?

In this post, I explain the particular circumstances why it affects doctors.

First, let’s look at what the Annual Allowance and Tapered Annual Allowance are.

What is the Annual Allowance

From my 2018 post on the Annual Allowance:

The Annual Allowance for 2018/19 is £40,000. What happens is this: if your total contributions into your pensions are greater than £40,000 you will have to pay a tax charge. This tax charge is the top marginal income tax rate on the excess above the AA.

As I mentioned in my Lifetime Allowance post, when you put money into a pension the Government provides tax-relief. The underlying principle under the pension tax-relief system is that you defer taxes.

With the Annual Allowance, the Government is basically capping the amount of tax relief they will give you in a year. In effect, the Government is saying: “you’ve got enough from us, you’re on your own now”.

What is the Tapered Annual Allowance?

The Tapered Annual Allowance is an additional, fiendishly complicated allowance. From my 2018 post on the Annual Allowance:

In 2016/17 the Government introduced the Tapered Annual Allowance (TAA). Aimed at ‘high earners’, the Annual Allowance is reduced for people who have ‘adjusted income’ over £150,000 and ‘threshold income’ over £110,000 a year. The AA reduces by £1 for every £2 over £150,000 down to a minimum of £10,000.

As noted above, both adjusted income and threshold income need to be above the limits. If you are over only one of the limits, the taper doesn’t apply.

Why does it especially hit doctors?

There are 6 reasons which, collectively, mean doctors are particularly vulnerable to the Tapered Annual Allowance:

1. They have high incomes

The Tapered Annual Allowance only comes into play if you have a high income. By high, we are talking more than £110,000.[2] That, of course, is different from being ‘well paid’.

2. Doctors can have variable incomes

Many doctors work extra shifts and overtime. This work is typically non-pensionable (if it’s outside their contractual arrangements).[3] But it means that knowing in advance exact yearly income is very difficult (or impossible). This is unlike many high earners who are typically salaried by one company with no overtime, meaning their year on year incomes are more knowable.[4]

3. They are in a Defined Benefit pension scheme

This means three things. First, their pension ‘accrues’ or increases at much higher levels than typical Defined Contribution pensions. Second, it means the amounts contributed towards the pension are much higher too. Thirdly, in a Defined Benefit scheme, you don’t know the contributions levels until after the year ends.[5]

This is important as: (1) accruing high levels of pension puts you closer to, or in excess of, the annual allowance of £40,000.[6] (2) the higher levels of contribution mean that adjusted income is liable to be far higher than threshold income, sometimes far in excess of £40,000. (3) The lack of visibility of contribution levels in advance make financial planning very challenging.

4. The NHS pension scheme is inflexible

It’s an opt-in or opt-out deal. Unlike with a private Defined Contribution scheme, a doctor can’t cut contributions if they think they’ll breach the Annual Allowance.

Likewise, there is, as far as I’m aware, little to no ability to negotiate alternative compensation arrangements in lieu of employer pension contributions if it looks like they will breach the Tapered Annual Allowance. I’m aware of several private employers who, when faced with the administrative burden of dealing with the Tapered Annual Allowance have said: stuff that, we’ll arrange for alternative compensation instead.

5. The NHS Pension Scheme is Unfunded

Most pension schemes are ‘Funded’. This means the scheme holds assets from contributions against future liabilities (future pension payments). On an individual level, this would mean theirs (and the employers’) contributions are invested so to pay out the future pension of that individual.[7] DB pension scheme liabilities are valued on an actuarial basis.[8] That is, some very smart math geeks add up lots of numbers on life expectancy to value the cost of paying future pensions.

In an Unfunded scheme, the contributions are used to pay current pensioners. There is no ‘float’. In the case of the NHS Pension Scheme, the Treasury guarantees the scheme’s liabilities. There is no pot of assets lying about. They effectively work on a ‘pay as you go’ basis.

Since April 2015 members of unfunded public sector pension schemes cannot transfer out to Defined Contribution schemes.[9] In effect, this means many doctors are ‘trapped’ in the NHS Pension Scheme.

6. Scheme Pays is ‘expensive’ for doctors

You can pay the Annual Allowance tax charge in one of two ways. You can stump up the cash to HMRC. Or you can get your pension scheme to pay the tax charge for you. This is called Scheme Pays.[10][10a]

In most DB schemes this works by the scheme paying HMRC. In turn, reducing your future pension according to a set calculation (often called the Commutation Factors). This factor is essentially how many pounds of future pension you give up for a £1 lump sum today. These are calculated by the scheme’s actuaries – updated every so often.

Generally speaking, this means it is financial neutral. You should on average, accounting for time value of money and ignoring the effect of taxes, be no worse off whether you pay HMRC in cash or elect to use Scheme Pays. It comes down to a personal choice: lump sum now, or reduced income in future. That said, as some helpful commenters have pointed out, the Lifetime Allowance is assessed on pension benefits after the deductions for Scheme Pays. So taking Scheme Pays may help to reduce a Lifetime Allowance Tax Charge. However, it is worth being mindful that: (1) your effective tax rate today may be higher than your effective tax rate in retirement; and (2) the future tax rates on pension benefits may change. Whether Scheme Pays pays will highly depend on a person’s financial and tax circumstances.

The NHS Pension Scheme works slightly differently. Instead, the tax charge is paid by the scheme and the payment is effectively considered a ‘loan’ to you. The interest rate on the loan is set at inflation plus 2.8%.[11] When you reach retirement age, the Commutation Factor is applied to the loan, including rolled up interest, to calculate the reduction to your pension.[12]

This creates two issues. First, unlike with many other schemes where the actual impact of Scheme Pays is known at the election, with the NHS Pension Scheme, it can only be estimated.[13] Typically, most schemes will roll forward the cost of scheme pays using a discount rate and then apply the reduction. So this cost of Scheme Pays is known.

Second, this makes Scheme Pays more costly for doctors. This is because unlike most non-NHS Pension Scheme members, they have to pay interest on their Scheme Pays Annual Allowance charge. In addition, when compared to current (March 2019) commercial borrowing, an interest rate of CPI + 2.8% is very high. As mentioned above, most schemes use an assumption for interest rates to calculate the future benefit reduction today. However, I understand (and a helpful actuary in the comments has also noted this) these to be typically around c.5%, though often lower. Increases to keep pensions inline with inflation are applied by the NHS at CPI+1.5%. This means that the cost of Scheme Pays increases faster than the inflationary uplift. Together, these make assessing whether Scheme Pays works out very difficult.[14] It varies significantly person to person and year on year.

Bringing it together

Collectively, this means that there are some unfortunate NHS employees left in an impossible position. Caught, often unintentionally, by the Tapered Annual Allowance. Many do not have the funds to pay the, often substantial, tax charge. Realistically, how many people have the means to pay an unexpected tax bill of tens of thousands of pounds (and as well as income tax)?

A combination of the large tax bills or missing the deadline for Scheme Pays means many doctors facing taking a ‘loan’ at inflated interest rates which eats away at their retirement pension. Some have opted out of the pension scheme. The NHS Pension scheme offers no flexibility to reduce contributions or accrual to avoid this.

We can see that the TPA was designed with anti-avoidance measures in mind. Adjusted Income is £40,000 more than Threshold Income – the same amount as the Annual Allowance. The idea being to snag high earners avoiding tax charges/higher taxes by putting more money into their pension. But it, perhaps unintentionally, set a trap for all the workers who, through no choice of their own, contribute and/or accrue more than the Annual Allowance to their pensions.

Bad tax laws hurt us all

At this point, some might be tempted to whip out their tiny violin. But this misses the point.

Bad tax laws hurt us all. Taxes should be fair. Or perceived to be fair. When they are unfair, they undermine our collective belief in social justice. Just because somebody earns more money, or has a particular profession, does not excuse bad tax policy.

The Tapered Annual Allowance is particularly punitive. This is compounded by poor design. You can get caught by the TPA unwittingly. And when you do, it can be often over a ‘cliff edge’.[14] This has the effect of distorting behaviour in a negative way. For doctors, this has meant many working fewer shifts – thus reducing services for the public – or putting less money away for their retirement.[15] That is a poor outcome for society.

I am glad that doctors are making noise about this. Many financial professionals have been complaining about the TPA for some time (myself included).[16] We have not been able to bring about an end to this ludicrous tax policy. I hope that the voices of our NHS professionals can change that.


Please note, I’m not an FCA authorised financial adviser. This site provides information, comment and opinion for information purposes only and should not be considered financial advice. The site may contain incorrect information or mistakes. You should do your own research or speak to an authorised financial advisor or financial planner before making any and every investment decision. If you make an investment or decision on the basis of any information you do it at your own risk.

All the best,

Young FI Guy


I try my hardest to make all posts as readable and jargon-free as possible. That is an immense challenge when it comes to something as complicated and convoluted as the Tapered Annual Allowance. In many places, I have favoured brevity over being comprehensive. That’s because to not do so would make this post unintelligible. I have indicated where it’s more complicated than that in the post:

[1] I use the word doctor throughout. But we should be mindful this can apply to other medical and non-medical in the NHS Pension Scheme.

[2] It’s Threshold Income of £110,000 we care about. See the diagram in the post or this explanation from HMRC: https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance#threshold

[3] What is and isn’t Pensionable Pay is quite complicated. The NHS defines Pensionable Pay as: “the basic salary excluding overtime (in excess of whole time hours), one off bonuses and expenses. Pensionable pay should however include regular payments such as unsocial hours allowance and London weighting.” (https://www.nhsbsa.nhs.uk/sites/default/files/2018-02/Employers%20quick%20start%20guide%20to%20the%20NHS%20Pension%20Scheme-20180222-%28V2%29.pdf)

[4] This also affects employees in the financial services sector who may have large discretionary bonuses (as a proportion of income), usually towards the end of the tax year.

[5] That’s not universal, but things such as discretionary bonuses, salary increases, one-off emoluments may occur during the year and change the amount and rate of accrual into a DB pension.

[6] For DC pensions this is calculated as:

For DB pensions this is calculated as:

Where ‘value’ is equal to pension income multiplied by a factor of 16. Note that if the difference is a negative amount then your pension input for the arrangement is nil.

[7] Individuals don’t have a ‘claim’ on specific assets of a pension scheme, there is no such distinction. That said, some mental gymnastics are used when, for example, a member transfers out from a DB to a DC scheme.

[8] There are loads of different valuation ‘bases’.

[9] Although it’s potentially possible to transfer to other Defined Benefit schemes. See Money Advice Service: https://www.moneyadviceservice.org.uk/en/articles/defined-benefit-schemes

[10] You have to meet a number of conditions to be able to use Scheme Pays. See this guide from Royal London: https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/scheme-pays/ For the NHS Pension Scheme see this guide: https://www.nhsbsa.nhs.uk/member-hub/annual-allowance

[10a] One of the conditions is that you must elect by 31 July in the year following the end of the tax year – so for the 2018/19 tax year this is 31 July 2020. This means that many people who are unaware that they are to be hit with a tax charge cannot then use Scheme Pays to pay the bill. Instead having to pay HMRC through Self-Assessment.

[11] NHS Business Services Authority: https://www.nhsbsa.nhs.uk/sites/default/files/2018-12/Scheme%20Pays-Election%20Guide-20181217-%28V1%29.pdf

[12] Pension Schemes aren’t set up to ‘loan’ money to members and aren’t allowed to loan money to members. See HMRC Tax Manual: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm123300 I’m not sure of the exact legal slight of hand the NHS Pension Scheme uses around this.

[13] NHS Business Services Authority: https://www.nhsbsa.nhs.uk/sites/default/files/2018-12/Scheme%20Pays-Election%20Guide-20181217-%28V1%29.pdf

[14] I’m explicitly talking about where someone is below Threshold Income (£110,000) but above Adjusted Income (£150,000) and an increase in earnings moves them marginally above the Threshold causing a big TPA tax charge.

[15] FT Adviser: https://www.ftadviser.com/pensions/2018/10/15/young-doctors-warned-against-using-scheme-pays.

[16] For example, from Citywire in 2017: https://citywire.co.uk/new-model-adviser/news/how-ifas-deal-with-the-ludicrous-annual-allowance-taper/a1008148

[Edited 28/03/2019: corrected error regarding the deadline for scheme pays – you must elect by 31 July in the year following the end of the tax year; corrected error in DB input diagram and added note explaining negative DB pension input is zeroed.]

[Edited 31/03/2019: following some helpful comments I’ve added a bit more on Scheme Pays (in italics). Hopefully, it’s still all digestible!]

24 thoughts on “NHS Pension Scheme and doctors

  1. Thanks YFG, you are one knowledgeable guy. I don’t have an NHS pension, but I do have a Civil Service one. I thought I was well-clued up on that, but until reading your post I didn’t realise that I couldn’t transfer my benefits *out*.

    Not that I’d want to – I think if the government is in a sufficiently poor state that it can’t meet it’s obligations on pension schemes, pension schemes will not be high up on our collective list of worries…

  2. Gazumped again!

    Whilst not an issue for me this is a serious issue for some of my bosses, and really strikes to the heart of the morale of an already disillusioned workforce. To add some anecdotal evidence to your points:

    1. Incomes – When combining my undergraduate and postgraduate training, I’ve been studying for well over a decade. As a postgraduate my pay has gradually increased to around the national average currently; in practice I earn £12/hour making decisions about whether someone will actually commit suicide when they say they will, at 4am in a busy A&E. The trade-off is that at some point in the next decade my pay will reach a good level. Never millions, but never poor. The NHS pay schemes benefit from being a monopoly employer, and the going rate in the private sector is 2-3x what the NHS pays. Yes, we are paid well, no tiny violins, but one of the few perks that persuaded us to stay in the NHS was the decent pension.

    2. Variable incomes – hard to explain to anyone in the public sector. NHS bureaucracy is terrifying. Extra shifts and overtime are not worked because we fancy the extra cash, it’s 9 times out of 10 due to staff shortages. A call will go out to say there are no doctors in a department, and people beg, steal and borrow staff. I worked on a paediatric team which was facing two weeks without senior level support. The trust was broke and couldn’t afford to hire in outside locums. The solution was to threaten the staff that they would be reported to the GMC and have their medical licences revoked as they were threatening patient safety if they didn’t fill the breach. In this environment you quite often work overtime without knowing in advance. You quite get asked on the day to work late. Predicting earnings or salary is very hard. I have a senior colleague who was asked to cover half of another persons on-call commitments as they could not staff it. They are now facing a £20k tax bill.

    3. Defined benefit contribution levels – Most doctors are PAYE. My contributions show up in my payslip, change monthly, and seem to bear little relation to what my NHS Business Services pension paperwork shows. Predicting is nearly impossible.

    4. Inflexibility – You are either in the NHS pension scheme or out of it. I’ve spoken to my payroll services and tried to discuss this. Computer says no. The system is monolithic and megalithic.

    5. Unfunded – I only realised I was trapped recently when trying to calculate my transfer out value. I had previously been on the 2007 Scheme and had a calculator for working out transfer values to a DC scheme. This is no longer offered. It’s infuriating, as all of my contributions to date are in effect locked, and completely reliant on what the government decides to do. If the government in 20 years time decides to raid the pension scheme again then I’m bound to their decisions. This is driving me towards withdrawing from the scheme completely, however I can’t set up different scheme and get employer contributions, because the NHS won’t support it. I understand that the BMA may be suing the government on this basis. I understand that the Government is being sued over the 2015 scheme: https://www.bmj.com/content/364/bmj.l1145

    6. This is also punitive. I have one colleague who has stuck their £20k tax bill on 0% credit cards. I have another who was promoted two years ago and has now had to re-mortgage his house to pay a £60k back-tax bill.

    Doctors seem to be unreasonably targeted by these changes. Many of my seniors are reducing their hours, worsening the NHS staffing crisis, because they are in effect fined if they work. They are unable to predict what they’ll be asked to do, so they’re reducing their base workload.

  3. Gosh it seems horribly unfair for Doctors, I wish pensions were simplified. I am not a Doctor, merely a lowly engineer but due to thrift, hard work, bonuses and lots of luck my private pension has already exceeded the LTA and by the time I retire the tax will likely be eye wateringly significant. I suspect that my situation is not that unusual. If I had known I would not have contributed so much. I can only think of a few ways of mitigating the tax, one is when the tax hit comes invest in VCT’s and EIS’s (not even sure if they can be used to offset tax of this kind) and the other would be to get a ‘technical’ divorce in order to split my pot with my spouse! It seems unfair that pension assets cannot be shared with your better half like other assets.

    The Doctors above who are paying 20K tax bills etc should consider EIS/VCT’s for the 30% tax relief against their income tax bill.

    1. Hi BeatTheSystem. You are certainly not alone in exceeding the LTA unintentionally. The latest research by Royal London estimates nearly 300,000 people are already over the LTA. And they expect well over a million people will fall foul of it.

      p.s. I don’t think the ‘tactical divorce’ ‘works’. Certainly, planning around the LTA is something worth speaking to a specialist about.

  4. I wonder how such cock-ups come about. Does Sir Humphrey warn the Chancellor only for the cocky Chancellor to pooh-pooh him? Or does Sir Humphrey loathe the Chancellor and set heffalump traps for him?

  5. One point that I didn’t see in your analysis is the level of benefit that doctors accrue in their pension. They effectively receive a 5% per annum benefit from their pension scheme in retirement. In comparison to pretty much every other pension scheme in the UK, this is extremely generous. Try finding an inflation linked annuity paying 5% at normal retirement age to compare with the doctors’ NHS pension. You will struggle to find anything close to that. So it is not all bad for doctors. For full disclosure, I am not a doctor, but my brother is, and we have had discussions on this recently. He was shocked when I told him what pension are like in the private sector, so I think there is a lack of understanding amongst doctors who work in the public sector. Just thought it was worth balancing the discussion…

    1. Oh, I know that and I know we still have a good scheme. My concern is that if I took on a more senior role, or took on extra hours, it would be very easy to end up owing more tax than income gained from an increase in salary, so I now have to bizarrely avoid doing anything that might temporarily increase my income as I couldn’t afford to! I’m not complaint about the scheme, it is still a good scheme, but the lack of flexibility in how much I contribute now and that I have to pay tax now on pension that I can’t draw for a number of years does seem unfair. Especially if I don’t make it to retirement!

  6. There may be a way to offset some of this though with scheme pays, particularly if you’re close to retirement (though still works if a bit away). My understanding is that the scheme pays becomes a “negative” pension account so when your pension crystallises, the “pot” is reduced by the amount you owe including any interest. If you’ve breached the lifetime allowance, you will be effectively taxed at 55% on anything above the LTA. This means your net pension will “only” be reduced by 45% of what you owe for the annual allowance charge. Obviously if you had paid it out of your own pocket at the time of the charge you pay it out of your net income so pay the full charge. If you take a loan out or add it to a mortgage then you obviously end up paying back more than the charge.
    Assuming pay rises in line with CPI (which I know is an assumption that hasn’t happened in recent years, but at some point it has to get back in line), I worked out that I’d have to draw my pension for 26 years before I was out of pocket with schemes paying for any charge I get now, and I’m more than 10 years away from retirement. Everyone’s different but it might be worth considering this. If I’ve got this wrong though please someone say!!

  7. @paul how do you explain the 5%? The current NHS scheme is a CARE (career average) scheme with an accrual rate of 1/54th.
    Yes the scheme is generous and I agree that many public sector workers have no idea how valuable their pensions are and how favourably they compare with DC schemes. (They aren’t nearly as generous as the old private sector DB schemes though!)

  8. The TAA is another example of how pensions and their taxation have not only reached silly levels of complexity but create outcomes that are unfair. Taxation policy needs to be fair and progressive and this clearly is not. Otherwise we risk societal attitudes like “all tax is theft”. So I’d strongly agree that tax justice is an important part of broader social justice.

    There is the reality, however, that our pension system now costs over £40bn/annum in lost tax revenue; the size of the fiscal deficit, more than the defence budget etc. That lost revenue is goes, by and large, to the better paid, such as doctors. While I believe “austerity” to have zero economic justification, in such world, I’m not sure how much tax justice there is in providing the better off 40%/45% tax relief whilst cutting things like disability allowances.

    I also have issues with the whole concept of public sector unfunded DB pension schemes. They create a massive disparity in retirement outcomes between the private and public sector. At a more fundamental level, I’ve never totally understood why a retired NHS cleaner and a retired NHS doctor should get different pensions. They are both retired, so what is the relevance of their prior job? I’d argue that the only unfunded “DB pension” that should exist is the state pension (preferably replaced by universal basic income). Beyond that everything should be DC, for a fixed amount and at a flat rate of tax relief. If that means public sectors jobs become less attractive, then they government can balance that out by simply paying public sector workers higher compensation. Of course, no government ever wants to do that. They much prefer to create an unfunded liability in the future, than pay the appropriate salary now.

    1. There is that trade-off between ‘subsidising’ the wealthy and ‘rich people need pensions too’. I think with the TAA the balance isn’t right. In an ideal world, you would use a measure targeted at total tax-relief over a lifetime. But I presume HMRC don’t have the data to do so.

      With the AA you have the entirely conceivable situation where an individual doesn’t have the cash to put away in a pension early on in their career (lower earner/children/saving for a house/paying off debts) but come their 40s/50s they make a ‘late dash’ and find the AA works against them.

      I also sympathise with the ‘gap’ between private DC and public DB pensions. Though I see it from a different point of view in that I think it’s a great shame that many private sector workers have ‘lost’ the security of a DB pension. I’m guarded against the comments of ‘gold plated’ ‘generous’ public pensions as, ideally, that should be the level of provision for retirement we aim for – even if, in today’s world, it’s unaffordable. Of course, I suspect, as you point out, that the reason the public sector holds on to DB schemes is not because it’s ‘good’ for staff. Rather, politically and economically it makes sense.

      p.s. glad to hear you are an advocate for UBI. I have a post lined up on this. I’ve done the research, I’ve just been too lazy to write it!

  9. Dear yfg
    Thank you for illuminating this complex issue with your usual clarity. As a NHS consultant your work has helped me to understand the risks that I face . In my opinion the nhs pension scheme is still the best deal around . But as in many ways it is becoming too complex to have any sense of agency over it. I was quite relaxed about all this dispute as I work part time and have rather the opposite problem of trying to put any extra cash into the scheme by buying additional years. However as I have reached the top of the salary scale and more extra clinics are coming my way I feel at risk of landing into dangerous territory . I will probably abstain to get into any extra work for the time being and also refrain to apply for any reward points.
    I agree that this is a nice problem to have but I would like to remind the public that given the number of people with the right qualifications and expertise available, doctors salaries would probably treble in a more open market scenario like the US. The nhs pension scheme has always been the way of controlling doctors pay making the nhs free for all a possibility . If the scheme is further eroded plus the restrictions in buying experts from abroad continue, I am unsure how things can go for the general public.
    In any case this is another motivation to get out of work ASAP.

    1. Thanks Carteianus, I’m glad it’s of help. I agree that the NHS Pension Scheme is a pretty good deal. But I’ll confess I feel uneasy when I see the oft trope of “doctors have it good, they should stop complaining”. Just because a deal is good, doesn’t mean there aren’t any problems! As a chartered accountant, the AA and LTA calculations are a bit tricky. I really think it’s questionable to ask people who are not pension experts to have to wrestle with these complex calculations.

  10. Hi YFG. I am one of those pesky pension actuaries (well currently, I am now in my final month before FIRE in my late 40s). I have to say that your explanations on this topic are by far the best I have seen outside of the industry. However, I have two points that I disagree with in this post.
    The first is about paying HMRC directly or using Scheme Pays is cost neutral in the right the circumstances. I would argue, as Whencaniretire pointed out, that Scheme Pays meets the tax bill out of pre-taxed monies whereas paying directly it comes out of post-taxed monies. This is quite a big difference unless the Scheme Pays terms are punitive.
    The second is that “interest” on the notional loan makes it more expensive than other forms of Scheme Pays. When the calculations are undertaken to reduce pensions in other schemes they include assumptions for interest rates, you just don’t see them. Having said that, CPI + 2.8% is quite steep, in my experience those other schemes will currently be making assumptions of something like 5% p.a. pre-retirement and 3% p.a. post-retirement (but there is quite a range in use).
    I 100% agree that the annual allowance calculations in their current form are stark raving bonkers. Why would you, in a self assessment system, invent a tax charge that most people can’t work out for themselves? I see people ignoring it because it is too complicated, which must be costing HMRC money and is adding to the unfairness. It will be interesting to see if HMRC catch up with those people in a few years time.
    When we start to debate tax relief, I think it is important to remember that this is not a tax giveaway but a tax deferral (with the exception of the tax free lump sum). If you tax on the way in and the way out, that is double taxation. In my opinion, I would rather see the tax free lump sum go (or be more seriously restricted) and throw away the AA & LTA.
    BTW there is another vote for UBI here.

    1. Hi JediMaf thank you for the kind words and also thanks for sharing your expertise! I’m going to add some of this into the post.

      With Scheme Pays it’s in theory cost neutral – you either hand over taxed money now to HMRC or you hand over future taxed money in your hands by using scheme pays. But obviously, with all the different moving goalposts with tax it might not work out that way.

      Thank you on the interest bit. This was something I wasn’t a 100% sure about. CPI+2.8% seemed steep to me, and from what I understand (from talking to people) is that c.5% is more common. The other issue also being that (as far as I understand) active NHS inflationary increases are CPI+1.5%, which means Scheme Pays deduction increases at a faster rate than the pension it is deducted from. I had originally planned to talk about other schemes but then you might start comparing apples and oranges – and I thought it would end up being another article that is just incomprehensible unless you have a brain the size of two watermelons!

      You touch on a key point that tax relief is really tax deferral. Which is something I talked about more in my old AA and LTA pieces. Somebody on twitter commented about this. Of course one of the issues is that, whilst in theory, our system is Exempt-Exempt-Taxed – in retirement, you get your tax-free cash, a typically lower marginal rate and you don’t pay NI. So it’s not quite double taxation because the taxes don’t match. It’s a minefield which I guess keeps many accountants and financial advisers busy!

      1. Hi YFG

        I agree with most your points here, other than the tax neutrality between meeting the tax charge directly versus meeting it with Scheme Pays. I hope I am not going too far off topic (which is the NHS situation) into general pensions taxation (which is not my specific area of expertise anyway). If I am, please feel free to cut this post with no hard feelings.

        Let’s consider a chap that has £1,000 in the bank (saved from his net earnings, so no further tax to pay) and £1,000 in a DC pension pot he is just about to access. If we assume he is currently a marginal higher rate tax payer his effective rate of tax on his pension pot is 30% (25% tax free and 75% at 40%). So he has spending power of £1,700 (£1,000 + £1,000 x 70%). Now he is landed with £1,000 annual allowance charge and he has the choice to meet it from the bank or from his pension pot (let’s not worry about where the charge came from, nor the rules about what pots you can meet it from). So if he meets it from the bank his remaining spending power is the pension (£700). If he meets it from the pension he extinguishes his full £1,000 pot before he takes anything out, so his pension pot is now nil and his remaining spending power is in the bank (£1,000).

        At least I think that is right. The usual caveats apply e.g. I am not giving advice, do your own research etc.

        1. I think we’re talking at cross pumps JediMaf. And please don’t feel there are any hard feelings. I am very glad for the really knowledgeable comments I get on the blog.

          I think what I’m trying to say is that, leaving tax aside, you should be no worse off in theory, on average, between Scheme Pays and a self-assessment payment after taking into account time value of money and actuarial factors.

          It obviously becomes much more complicated when you have to add in tax and the person’s individual circumstances.

          I think your numbers are right BTW – and in that sense, a good example of when Scheme Pays works. But if you change a few things it becomes more complicated (time to reach pension, losing money protected by the tax free wrapper, different tax rates pre/post retirements, the alternatives to a pension, like ISAs etc.) A classic example of when good advice pays!

          Again, thank you for your comments – I really appreciate them! And reflecting on your comment I’ll make a stab at trying to make the post a little clearer. It’s always a challenge as I try very hard to have as few jargon terms as possible, except for reference. Sometimes I don’t quite get the balance right!

          1. Hi YFG

            I agree with everything in that comment.

            I think the tax situation gives Scheme Pays a good head start, but you are absolutely right that it doesn’t make it a surefire winner in all circumstances.

            It is hard to make pensions simple and understandable (nigh on impossible for high earners pensions tax) and you do a sterling job at it. I appreciate the work and skill that goes into this blog.


  11. Thanks – useful article. Pensions is the area I found most complicated. SIPPs are easy to understand, but anything beyond that I (currently) find overly challenging.
    My wife is a NHS worker. Working out how much SIPP contributions we can make to max out her annual allowance is difficult – like you say, we only really find out the NHS pension contribution part after the tax-year ends. Not helpful.

  12. Hi YFG. Thank you very much for providing the clearest explanation I have come across so far regarding the NHS Pensions changes. The comments have also been very helpful. I am a female Consultant Surgeon working predominantly with breast cancer patients and am liable for an unexpected tax bill of upwards of £20 K. I don’t think that enough has been made of how discriminatory these pension changes are. I didn’t start working for the NHS until I was 30 and will come nowhere near the LTA. I had time out to have children and also worked part time when my children were younger. I was advised to get some buy back years which I did. At the end of my training I did a year long Fellowship which involved a big cut in pay because there was no on call component. I therefore took a break from buy back years. To stay in the scheme I had to pay arrears once I started as a consultant. This meant that I was paying my standard pension contribution plus buy back years plus arrears for a period of time and this has taken me over the annual allowance. This has been compounded by the fact that my service is consultant led (there are 3 of us) and geared around meeting the 2 week wait cancer targets. We are very proud of our service (or were). We hardly ever breach because we put on extra clinics whenever we see a spike in referrals. If there is a bank holiday we put on Saturday clinics to avoid a delay for patients. This has now come back to bite us and all 3 of us are liable for punitive tax bills. We are all cutting down our hours which will result in the loss of around 18 consultant hours a week to our service. We can no longer take the risk of doing additional clinics. There are so many awful things about this situation – the unexpected nature and magnitude of the charges, the lack of control and the fact that we are being punished for working that extra bit harder to provide a high standard of care. I know of many doctors who are cutting back on their hours. The first things to go are the roles relating to governance and education so the quality of service provision and training will go down. Of course we earn good money. I don’t know any doctor who isn’t more than willing to pay their fair share of taxes. The point is that there are many aspects of this tax system which are grossly unfair and I think it could potentially break the NHS. I didn’t think morale could get any lower but it has.

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