NHS Pensions are a complicated issue for doctors, with many becoming worried that they need to pay extra tax as well as the standard income tax. As a result of the tax rules recently introduced, some doctors believe staying in the scheme could result in them being penalised for exceeding limits on how much pension benefits they can build up each year, and then, how much they can withdraw when they come to retire. However, despite these recent changes, the UK tax system is still encouraging people to save for their retirement by providing very generous relief.
Is my NHS pension taxable?
Pension benefits are considered as earned income and are taxed as such. There are no National Insurance contributions deducted from your NHS pension.
Tax turmoil
Many doctors are opting out of the NHS Pension Scheme driven by issues regarding tax. The BMA has written to the Government about this as the number of medics choosing to retire early is causing concern within the healthcare service.
It is not only medical professionals who are, at times, unaware of how the tax system works, many financial advisers and accountants are equally confused by the complex and detailed NHS Pension Scheme.
Staying power
According to Andrea Sproates, Head of Chase de Vere Medical, during the many years of advising clients, there have been very few occasions when opting out of the NHS Pension Scheme has been the right thing to do for doctors.
She urges those doctors who are considering leaving the scheme to seek independent financial guidance first, and, for those who have already left the NHS Pension Scheme, it could be worth re-joining.
Watch the interview with Andrea Sproates, and read Chase de Vere Medical’s comprehensive NHS Pension Scheme tax guide here.
Talking tax
As a member of the NHS Pension Scheme you could have an additional tax liability if your pension savings exceed limits set by HM Revenue and Customs (HMRC).
These limits are known as the annual allowance, which is calculated each year, and the lifetime allowance, which is calculated based on overall pension benefits when you actually draw them.
Annual Allowance
The annual allowance is the total amount of benefits that you can build up in a defined benefit pension scheme, like the NHS Pension Scheme, each year and/or the amount of contributions that can be paid to defined contribution pension schemes like personal pensions. It is set by HMRC and applies to any
registered pension scheme (and certain non-UK pension schemes) but it doesn’t include the State Pension. The standard annual allowance limit is currently set at £40,000.
If your pension savings or benefit accruals are more than the annual allowance (in one tax year), you will receive a tax charge on the additional amount. The tax rate charged will reflect your marginal income tax rate. The charge can either be paid personally by you or, in some cases, out of your pension scheme benefits.
It is possible to carry forward any unused annual allowance, providing you are a member of a qualifying pension scheme, at some time during each of the three previous tax years. You can carry forward unused annual allowances for a maximum of three years, so long as you were a member of a registered pension scheme in the year that you are carrying forward from.
Tapered annual allowance
The government’s tapered annual allowance rules introduced in April 2016, mean that if you’re an NHS doctor who is deemed to have a threshold income over £110,000 and an adjusted income above £150,000, your annual allowance will be lower than this £40,000 limit. It’s crucial to check whether you’re affected by the taper.
Lifetime Allowance
The lifetime allowance is the total amount of pension benefits which can be drawn from your pension schemes, without incurring a tax charge. As with the annual allowance, the lifetime allowance is set by HMRC and the current limit is £1,030,000. This increases annually in line with inflation and in April 2019 will increase to £1,055,000.
There are a number of things that can instigate this charge including long pension membership, high earnings and private pension investments. If you do exceed the lifetime allowance you may be at risk of incurring this charge at retirement.
Life after work
You are a medical professional with a career devoted to taking care of others. When it comes to considering life after work, it is important that you take care of your pension and plan carefully for retirement.
You need to be aware of your total NHS pension savings and how you plan to enjoy life when the time comes to stop working – including actions you may wish to take in relation to the annual and lifetime allowance limits.
If you’d like to find out about this in more detail, you can read Chase de Vere Medical’s comprehensive NHS Pension Scheme tax guide here, or attend one of our Pensions and Taxation seminars near you.
Your aspirations for a well-earned retirement will be as individual as you are.
At Chase de Vere Medical we have provided financial services to doctors for 13 years.
Our experience and independent advice mean your plans will be tailored to meet your specific needs. Our specialist knowledge will help you enjoy the retirement you have worked so hard for. Get in touch today to find out more
Content correct at time of writing and is intended for general information only and should not be construed as advice.