The NHS pension tax trap - and how to escape it

The 'pension tax trap' that's affecting senior NHS doctors has been getting plenty of media attention over the past few months. But if you're one of the senior doctors and consultants that's directly affected by this issue, you'll already know about the detrimental effect on your earnings.

In this post, we'll give you the lowdown on the potential tax trap, what the implications are and how you can get proactive about minimising the negative impact.

What's the tax trap?

As a member of the NHS defined benefit pension scheme, you have little or no control over how your pension benefits increase over the course of a financial year. If you work longer hours, or take on extra shifts, you will earn more – and this can then be reflected in your contributions.

Due to prior changes that were made to the pension contribution rules relating to the annual allowance and lifetime allowance schemes, if significant benefits are paid into the NHS scheme, you can end up being hit with a serious level of deductions on your earnings.

The considerable hit on your earnings is the problem - hence the 'tax trap' moniker.

What are the implications on earnings?

The Catch 22 situation of the pension tax trap has seen many doctors and consultants losing a large part of their pay - almost to the point where you can end up working for free when taking on any extra shifts or covering for other colleagues.

This has had two key outcomes:

1. Many senior NHS doctors and consultants are cutting back their hours and shifts – leaving hospitals with a staffing shortage and a lack of senior medical practitioners.
2. Some senior staff are resigning and leaving the NHS altogether, due to the negative impact on their income and tax position.

The British Medical Association (BMA) has already written to the Government in an aim to combat this growing crisis, with Dr Rob Harwood, BMA chair, consultant committee, stating in the BMA's letter:

“It cannot be right that doctors working extra hours to reduce waiting lists or cover rota gaps are then hit with additional tax bills greater than the value of the extra hours worked.”

Left unchecked, the pension tax trap could bring about a serious crisis within the NHS, at a time when hospitals and staff are already struggling due to lack of funding.

So, is there a resolution?

Finding a way to rectify the tax trap

The Government is, thankfully, taking action to combat the effects of the pensions tax trap.

Changes to the NHS pension scheme have been suggested where a '50/50' pension approach would be used – meaning that, as an NHS doctor or consultant, you could pay half of your usual pension contributions for up to 10 years during the time you pay into the scheme. What you then receive from your pension on retirement is then reduced to mirror the 50/50 contributions.

This would serve to lower the contributions level NOW, reducing your tax liability and stopping the negative impact on your earnings.

This is a sound solution, if the changes are brought to legislation. The problem is that this doesn't change your own immediate situation, or the impact of the tax trap for your current earnings as a medical practitioner.

If you're stuck in this situation, what can you do?

How we can help

We're strong believers in the power of the National Health Service (NHS), and the hard-working and diligent people who keep our hospitals running day-to-day.

If you're being affected by the tax trap, we'd strongly advise coming to talk to us. In some instances, it's too late to carry out any tax planning for the current tax year. But there are ways in which you can manage and plan your earnings, pensions contributions and wealth management to minimise the impact.

Get in touch and find out how we can help you escape the tax trap.