Doctors taking early retirement as pension tax rules bite

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Some doctors have found their incomes disappearing as an unwelcome consequence of measures designed to limit the cost of pensions tax relief to the Treasury.

We explain the impact of the pension annual allowance tapering rules.

According to a recent Financial Times report some NHS consultants are being landed with tax bills of up to £87,000, meaning their earnings are being swallowed up by taxes. This is prompting an increasing number of doctors to reduce their working hours or even take early retirement.

The doctors’ problems primarily stem from the implementation of the pension annual allowance tapering rules. These have two key trigger points:

  • ‘Threshold income’ (broadly speaking total income from all sources, less personal pension contributions) exceeding £110,000; and
  • ‘Adjusted income’ (broadly total income from all sources plus employer pension contributions) exceeding £150,000.

If both levels are crossed, then the standard annual allowance for pension contributions of £40,000 is reduced by £1 for each £2 by which ‘adjusted income’ exceeds £150,000, subject to a minimum annual allowance of £10,000. The all-or-nothing nature of the triggers can mean that just an extra £1 of earnings brings the taper rules into play. That additional £1 could therefore result in an additional tax bill of much more than £1.

To complicate matters further, £110,000 sits almost in the middle of the band of income between £100,000 and £125,000 at which the personal allowance is tapered away, creating an effective marginal tax rate of up to 60% (61.5% in Scotland). Added to that will usually be 2% national insurance contributions.

The Financial Times article said that many doctors had been ‘surprised’ by their pension tax bills. This implies they had not sought personal financial advice on how the pension tax taper rules, introduced from April 2016, would affect them.

There are ongoing discussions between the Treasury and the Department for Health and Social Care about the issue, but it seems highly unlikely the former will forgo the revenue generated by the annual allowance rules (over £560m in 2016/17). In the meantime, the episode serves as a reminder of the importance of regular financial reviews to avoid – or at least be aware of – the growing range of tax traps in the UK’s labyrinthine tax legislation.

For advice on how the pension taper rules may impact you please contact your adviser.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

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