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What the new Tapering Means for NHS Pension Holders (in Practical Terms)

One of the issues that dental and medical professionals were hoping to see addressed in the Budget 2020 announcement was the tapered annual allowance which caused an NHS pension crisis.

This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice. 

The good news is that new rules were introduced, but the changes take effect 6 April 2020 – next tax year, so those that exceeded the allowance limit this tax year will still need to follow the process once again for 2019/20.

Tapering – the old way

As the tapered annual allowance impacted high earners, it disproportionately affected doctors and dentists. The £40,000 limit was implemented to curb the benefits extremely high earners gleaned from the pension tax relief. Many healthcare professionals were subject to allowance tapering bringing their allowance down to just £10,000 annually.

Essentially, the allowance was reduced by £1 for every £2 you earned over £150,000, with a £10,000 minimum. It wasn’t so straightforward though, as the calculations used to work out your income were complicated — gross income minus personal contributions to a pension needed to exceed £110,000 and adjusted income (gross income plus employer pension contributions) needed to exceed £150,000.

Plus, members of the NHS pension scheme were stuck. Because it’s a defined pension scheme linked directly to salaries and income, they were unable to lower contributions and therefore breached the threshold — often completely unaware they were doing so. This resulted in a surprise tax bill that many were forced to find creative solutions to pay or see their pension benefits reduced and after one bill too many, avoid entirely by withdrawing from the scheme or limiting working hours.

New tapering rules

In the budget statement last week, the thresholds increased by £90,000 – from £110,000 to £200,000 and £150,00 to £240,000 for gross income and adjusted income, respectively. With the higher limits, the number of doctors and dentists affected should hopefully dwindle.

It’s important to note that now the tapered annual allowance can go as low as £4,000 for those earning £312,000 or more – certainly a blow, but one that shouldn’t affect as many as the old rules.

This solution should ease many doctors’ and dentists’ minds and get them back to working full time again, which couldn’t have come at a better time with the entire world dealing with the coronavirus outbreak and the extra strain put on the NHS during this pandemic. But it doesn’t solve the entire problem created by tapering, so the pressure is still on for the government to come up with a long-term resolution.

A detailed breakdown of tapering allowance:

Adjusted IncomeAnnual Allowance -
New Rules
Annual Allowance -
Old Rules
£210,000 - £240,000£40,000£10,000

Work with an expert

Calculating the taxes, contributions and adjusted income can be confusing, so to be sure you get things right, reach out to a financial professional.

Taking care of doctors’ financial affairs for over 30 years – Darren Scott-Guinness is an expert in the field, working with hundreds of doctors to help them understand and work on ways around the NHS pension issue. Get in touch today.

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Dental & Medical Financial Services have been helping doctors and dentists to build and protect their wealth, whilst saving tax for over 25 years.
Call Darren to discuss your options.

Tel: 01403 780 770


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