No easy answer for those caught in pension tax trap


Peter Young

Peter Young

Tax Partner


Doctors, dentists, university professors, head teachers, MPs and senior civil servants approaching retirement are among those facing some tough choices as complex pension tax measures begin to bite.

It’s a perfect tax storm. Complex measures and punitive charges coupled with a lack of clarity and awareness are leading to unintended consequences - such as experienced medical professionals reducing hours - as many in the public sector struggle to get to grips with how best to tackle the scenario.

Recently, the scale of the problem was finally acknowledged by the Government and NHS. The Interim NHS People Plan announced there will be a consultation on new pension flexibility for senior doctors but the Government has gone further by allowing greater flexibility in terms doctors in England and Wales to reduce their pension contributions and receiving further salary in lieu of employer pension contributions.

The planned new rules are to be introduced from April 2020. Devolved powers mean that the Scottish government will need to give consideration as to what they may do for doctors employed by NHS Scotland.

The Government has signalled its intention to look how public sector workers are taxed on their pensions to see if the tax rules may be adjusted or relaxed but it may be at least another year before any changes are introduced.

So the pensions tax problem remains for now and we have just passed a key date for those with pension tax charges for the 2017/18 tax year. Where the tax charge exceeded £2,000 for 2017/18 a claim needed to be made by 31 July for asking the pension schemes to pay the charge. HMRC will charge interest and penalties on late tax payments.

The tapered annual allowance was introduced from 6 April 2016. In short, it meant a reduced annual allowance may apply to all pension savings by or on behalf of a member, depending on the level of taxable income within the tax year.

In many cases, those with private pension schemes affected by the tapered allowance are already working with their employers to negate the impact.

Peter Young

Tax Partner

Those with a threshold income of more than £110,000 and an adjusted income of more than £150,000 are affected. For every £2 that an individual’s adjusted income goes over £150,000, their annual allowance for that year reduces by £1.

In many cases, those with private pension schemes affected by the tapered allowance are already working with their employers to negate the impact. Strategies such as pension contribution caps, share issues and cash pay outs have already been rolled out.

It is people in more inflexible (albeit generous) defined benefit schemes such as senior staff in the public sector, like NHS consultants and Scottish MPs, that will be hit hardest as inflexibility in the system means there is no room to address the issues associated with the tapered allowance. Instead they will have to choose between paying hefty extra tax bills or agreeing to come out of the pension scheme.

Others have already submitted incorrect tax returns to HMRC, while many are unaware they need to report anything due to carrying forward unused annual allowance. However, you can only take advantage of any unused allowance from the previous three tax years and since the tapered allowances was introduced in 2016, that head room is now running out in many cases.

As a result, there will be a significant hike in numbers of those facing tax bills for as much as £15,000 to £25,000. This can be paid in a one-off instalment, but generally this is unaffordable for most taxpayers.

The suggested solution is generally to ask the pension scheme to pay the tax. This seems like a good idea until you see the size of the projected annual lifelong pension reduction for both the individual and their dependants. For 2017/18 pension allowance tax charges the deadline was 31 July 2019, just six months after the 2018 tax return submission deadline, and a date that will be missed by a significant number of people.

These are not easy choices for those caught in the pension tax trap, but people need to make moves to address it now - or face penal consequences.

For further information or to discuss your options if you are facing pension tax problems, please get in touch with Peter Young.