Unexpected pension tax charges for those in defined benefit pension schemes


Peter Young

Peter Young

Tax Partner


Doctors and dentists approaching retirement are having to choose between paying hefty extra tax bills or agreeing to a reduced pension. Many others have already submitted incorrect tax returns to HMRC and are unaware they need to report anything.

Medics are not the only ones affected. University professors, head teachers, senior civil servants, MPs and MSPs still benefit from pension schemes linked to their final salary, as do many financial sector workers and private company directors. They too are being asked to pay huge sums in tax based on the annual growth in value of their pension fund.

The problem is particularly acute for higher earners in generous pension schemes where the combined taxable value of actual income and imputed pension growth exceeds £150,000.

Annual tax bills of £15,000 to £25,000 are not uncommon. This is extra tax on top of normal PAYE liabilities, and is unaffordable for most taxpayers.

Paying tax through a pension scheme

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.

The other problem is that there is a strict 31 July deadline for asking the pension scheme to pay up. It is already too late to ask for pension scheme help to meet a 2016/17 liability, and HMRC will charge interest and penalties on late tax payments.

For 2017/18 pension allowance tax charges the election deadline is 31 July 2019, just six months after the 2018 tax return submission deadline.

How we can help

If you have a final salary pension scheme it’s advisable to seek advice on the tax you might be due to pay and to get a plan in place for making the payments otherwise you may be landed with a large tax bill with very little time to plan for it properly.

Get in touch with me Peter Young or another member of the Private Client Tax team if you think you may be affected for tax planning advice.