Nick Stones of Pinsent Masons, the law firm behind Out-Law.com, said recent news about how some senior NHS doctors are limiting their working hours to avoid large pensions tax bills, despite the demand for their services, call the appropriateness of the existing thresholds into question. However, he said the broader public policy basis for the pensions tax needs to be factored into any debate over changes.
The Financial Times reported on Monday that leading figures in the NHS were due to discuss the issue of consultants rejecting the offer of additional shifts because of the impact it can have on their pensions. It said NHS consultants it had spoken to had reported being hit with tax bills of between £6,000 and £87,000 after accepting extra work.
The amount a person can save each year in a pension scheme before tax charges - known as the annual allowance - is £40,000. Since April 2016 the allowance has been tapered for those with annual incomes exceeding £150,000. For every £2 of adjusted income over £150,000, an individual's annual allowance is reduced by £1, down to a minimum of £10,000.
The government imposes a tax charge on pension savings above the annual allowance. The tax charge applies to the pension savings in excess of the annual allowance. The amount of the charge is intended to reverse the tax relief on the excess savings. The tax rate is 20%, 40% or 45% depending on the person's earnings.
Stones said: "It is not just NHS staff but also more senior police, fire-fighters, civil servants and other public sector staff who are impacted. Whilst the public focus is rightly on the impact this has on the provision of medical services it must be remembered that the pensions tax is aimed at people who earn a lot of money by most people’s standards. The reality is that people earning in excess of £100,000 or who have pensions savings in excess of £1 million are well remunerated. The law does provide for such people to take steps to manage the risk so that they can do the work, and get paid without incurring the pensions tax charge."
"Assuming that we want a tax system that re-distributes some wealth then the law does not discriminate between a person as to whether they are employed by the public sector and there would be a moral hazard in so doing. Instead, the question is whether the current thresholds for the tax to bite are at the correct level and whether the individuals and their employers are equipped to deal with the complexity of the system," he said.