Why tax can affect your health

Doctors, just like other earners, pay tax on their income.  However, those doctors in an NHS pension scheme are increasingly incurring large additional tax charges while still working.  It is dis-incentivising older and more senior doctors from working beyond the age of 55.  It is leading to a rapid rise in those retiring early at a time when the NHS workforce is already dreadfully short of experienced staff.

Most NHS staff are in an NHS pension scheme.  How much a doctor’s projected pension grows each year is directly related to his/her pensionable earnings, the duration of scheme membership, and a range of factors determined by the pension provider.  If a consultant, who has worked for over 25 years, receives a pay rise of a few percent then it is likely that the calculated pension growth in that year will exceed the annual allowance of £40,000, the Government’s threshold for tax relief on pension contributions.  Such a consultant would be expected to pay his/her marginal rate of tax on the projected growth above the allowance of £40,000.  It has been estimated that if such doctors this year received a 30% pay rise to bring their salary to a comparable value in real terms to that in 2010, they could incur pension tax charges of over £80,000.  This would mean that in that in such a year their tax bill would be higher than their income.  Even a pay rise of 5% could mean doctors had a negative net income after paying income tax and pension tax. 

To make matters worse, once doctors exceed certain income thresholds this annual allowance of £40,000 is tapered.  It drops by £1 for every £2 of ‘growth’ above the threshold until it falls to £4,000.  This means very senior doctors at the pinnacle of their profession pay high levels of income tax and high levels of pension tax.  Their take home pay after all these tax deductions could be less than their younger colleagues. 

To make matters even worse, once doctors projected pension pot, made up of possibly 30 or more years growth exceeds what the Government labels the lifetime allowance, these doctors on retiring are charged a 55% tax on the excess above the allowance.  This means doctors are at risk of double taxation: a pension tax on projected pension growth while working; an additional pension tax on any excesses above the allowance on retiring.

These matters are exacerbated because of high inflation, the Government’s decision to reduce lifetime allowances and then to later freeze them, and the freezing of the annual allowance. The British Medical Association has labelled the current defined benefit scheme perverse and not fit for purpose.  It has shown that most doctors, because of pension tax, will be financially better off retiring early.

The Department of Health recently listed 11 ways of encouraging doctors to stay beyond their retirement age.  Not one mentioned pension tax reform. 

And so, because of their tax policies, successive Governments are perpetuating the exodus of the most experienced and skilled doctors from the NHS and negatively impacting the health of the nation.  Expect waiting times to increase!

Tax Team

Finance, Accounting and Economics Department