How pensions puncture productivity

25 April 2019

This article was featured in the May 2019 issue of the magazine.

Henry Tapper, director at First Actuarial, outlines the complex effects of the tapers for personal allowance and pension annual allowance in light of recent changes 

One of the benefits of high earners is they tend to work a lot and are a blessing for organisations, such as the National Health Service (NHS), that rely on flexible rostering. The NHS relies on consultants and senior general practitioners to work overtime where there is demand and with waiting lists as they are there is on-going demand.

But NHS administrators are finding that previously uber-productive high-earning medics are turning down work, citing their pension schemes as the issue. More precisely, they point to the complex interaction of the tapers on personal allowance (above £100,000 of earnings) and the pensions annual allowance (above £110,000) which can lead to substantial unexpected tax bills.

The problems of complex, cliff-edge tax structures are the same in private and public sector: they can result in marginal tax rates of over 100% as the following case study of a NHS consultant shows.

“In the financial year 2017–18 I accrued a sizeable increase in my NHS pension benefits due to going up a salary increment, obtaining a higher NHS excellence award (an award for going above the call of duty) and by virtue of my pension contributions being at 14.5 per cent and the employer contribution. 

“My so-called ‘threshold income’ for that year was just under £110,000 and even with rolling over previous years’ unused annual allowance I was left with a several thousand-pound tax bill on contributions over the annual allowance limit. 

“If I had done a couple of extra sessions for the NHS, this would have taken me over the threshold allowance and resulted in loss of the annual allowance with the effect that my tax bill would have been nearer £15,000.” 


...pressure has been mounting on high earners as repeated cuts in the pension annual allowance begin to bite...


What is surprising about this doctor’s situation was that he wasn’t a particularly high earner (by medical standards). __Doctors must start worrying about the tax implications (from both tapers) as soon as they are earning over £100,000 – and the problem gets harder where some earnings (overtime, for instance) aren’t deemed pensionable. Non-pensionable earnings are liable to income tax but can also taper the pension annual allowance, creating a second taxation event, where pension contributions exceed the annual allowance.

Exceeding the annual allowance is all too easy when the pension contributions are calculated against the high contribution rate demanded of NHS doctors and they lead to most unpleasant surprises when a pension tax-bill arrives. Recognising that these tax-bills normally have to be met out of taxed income and that cash may not be easy to find, the NHS pension scheme has introduced a ‘scheme pays’ facility, which effectively mortgages future pension payments using a rolled-up debt charged at consumer price index+2.4% (it has been tighter). This at least gets rid of cashflow problems, though many doctors, mindful of their retirement, choose to ‘self-pay’ instead.

Until recently, these issues have been relatively low-profile, but the pressure has been mounting on high earners as repeated cuts in the pension annual allowance begin to bite. High earners have the capacity to carry back contributions and soak-up unused annual allowances for three years. This April however marked the first time that high earners are not able to carry back to the more beneficial tax climate that existed before April 2016. 

As the bills increase, so does the protest. The doctors’ union, the British Medical Association, has called for the taper to be scrapped. The NHS pension scheme recognises its own inflexibility and is calling on government to allow it to change its rules so that doctors can partially opt-out and so manage down their tax liabilities. 

The problem is now very much in the national press, with the Financial Times running a series of articles pointing to the productivity problem for hard-pressed foundations that can no-longer call on many doctors for emergency work. The problem also recently featured on Paul Lewis’ Money Box

Anyone with an interest in pensions, who spends time on Twitter will come across long and complex threads involving doctors discussing with each other how to manage their liabilities (without incurring extra advisory fees from the few independent financial advisers and accountants who properly understand the problem).

While the problem is more acute in the public sector where most defined benefit accrual still happens, it is still a private sector problem. For that reason, many large private sector schemes (including defined contribution schemes) are now capping pension contributions at £10,000 and paying salary in lieu.

While many large employers have pension and tax departments with access to advice on these matters, we are finding many medium-size companies with defined benefit schemes unaware of these problems and unable to administer a ‘scheme pays’ arrangement. For them, specialist help is needed.