News added on 25.11.2019

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Pensions

NHS emergency pension tax fix

The government is going to pay the 2019/20 annual allowance tax charges for NHS staff. Why is this happening?

Tapering rules. The annual allowance for pension contributions is £40,000 per annum but is tapered to a minimum of £10,000 for high earners. Anyone exceeding their annual allowance can expect a tax charge at the end of the year. The tapering rules have been highly criticised for penalising those in defined benefit schemes, as the increase in value of the fund counts towards the annual allowance.

The Laffer curve in action. NHS doctors have been turning down extra shifts to avoid incurring annual allowance charges on their pension contributions. This has led to staff shortages and is impacting NHS services. To combat this, the NHS pension scheme will pay the annual allowance charge for the current tax year out of the individual’s pension pot. This is referred to as "scheme pays" and usually means that the individual would lose some of their total pension savings. However, the NHS is also promising to top up the individual’s pension pot when they retire, so that they will not lose out by working extra hours this winter. 

What is the impact?  NHS staff may have been given an immediate short-term solution, but it does nothing to address the tapering of the annual allowance in future years. They could even face a tax charge in the year they retire when the pension is topped up. Due to the upcoming election, the government has not offered any solutions for the next tax year, but critics are calling for the tapering provisions to be scrapped. There is likely to be backlash from other high earners, who have not been given the same opportunity to avoid a tax charge.

Tip. Any unused allowances from the previous three tax years can be carried forward, make sure you check whether you have any to use before turning down additional income.

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