Philip McEvoy tells us why the wrong pensions tax reforms
could make a bad situation worse for NHS dentists worried about breaching the Annual Allowance.
Photo (c) Getty Images
The old Inland Revenue (now HMRC) once used a bowler-hatted cartoon character called Hector the Inspector to joyfully advertise the fact that "Tax Doesn't Have to Be Taxing". I can't help thinking, poor Hector would be spinning in his cartoon grave right now, if he knew how the current system for taxing pension savings worked.
The perverse incentives created by these rules and their profound impact on NHS service delivery are well documented. We have consistently called for reform within the NHS Pension Schemes (and other public service pension schemes) to give individuals options that will allow them to build up a lower NHS pension, in exchange for a lower contribution. Pensions tax reform would help dentists to ensure that their pension savings do not breach Annual or Lifetime Allowances.
Recent moves made by the government seem to indicate that there is at last some appetite to reform the pensions tax system. Indeed, the Conservative Party 2019 manifesto recognised the problem caused by the pensions taper and committed to a review within 30 days of re-election. I am hopeful that it will be one of the issues tackled in the up-coming budget.
Should they remove the Annual Allowance for NHS dentists?
Some support the removal of the Annual Allowance taper, the Annual Allowance and Lifetime Allowances. The British Medical Association (BMA), for instance, are calling for the removal of the annual allowance in defined benefit pensions schemes, such as the NHS scheme. The Office of Tax Simplification has also suggested this as a possible solution. The simplicity of this solution certainly seems quite appealing.
However, these taxes raise hundreds of millions of pounds for Government – money which funds public services, including the NHS. If the regime is changed it is likely that the Chancellor will look to recover this money from elsewhere. Indeed, it is likely that wider pensions tax reform could be adopted to offset the lost income.
It has recently been reported that the Chancellor will look to change the tax relief on pension contributions, so that this is given at a rate of 20% - meaning that 40% and 45% rate taxpayers do not get full relief on pension contributions. But even if this was introduced as a trade-off for scrapping the Annual Allowance, there would be winners and losers.
Lower earners will likely be hit
Based on some very broad assumptions (most crucially that the example individual is a new member of the 2015 NHS Pension Scheme), we estimate that:
- Someone on £30k would not be affected
- Someone on £60k would be £1,500 per annum worse off after tax charges and pension contributions
- Someone on £90k would be £2,500 worse off
- Someone on £120k would be £7,000 worse off
- Someone on £150k would be £2,000 better off.
For this reason, we are cautious about potential pensions tax reforms that may be announced in the March 2020 Budget, and our preference is for pension flexibilities that give individual options to better manage pensions savings and tax exposure.
We hope that pensions tax problems can be solved without extending tax charges to lower earners. However, if the Chancellor's proposals make more people worse off and many dentists are likely to be detrimentally affected, we will regard this as a very poor outcome indeed.
Head of Pensions
More information is on our website: www.bda.org/pensions-tax
BDA Extra and Expert members can benefit from one-to-one advice with our Pensions Team, please get in touch if you'd like to discuss this issue or any other aspect of pensions and their taxation, email us or telephone 020 7563 4161 / 6897.