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Sunday, December 5, 2021

The NHS is creaking at the seams – why is the Government punishing doctors with higher taxes?

This means that as each year is worked and earnings increase through extra hours worked or promotion, the notional savings pot can grow rapidly from one year to the next. So while an annual pension savings limit of £40,000 sounds generous, it can be triggered simply by an extra year worked and a pay increase. 

This is the root cause of the problem being faced by many doctors. It is compounded by two other factors. Doctors in the schemes are obliged to make contributions from their earnings of between 5pc and 14.5pc, depending on salary. In addition, many of our most experienced doctors are caught in the personal allowance trap where their effective income tax rate is 60pc on earnings above £100,000. 

Paula, for example, is in this position and is also required to make pension contributions at 14.5pc.

So with income tax at 60pc, National Insurance contributions at 2pc (and about to increase), plus 14.5pc pension deductions she would only keep as cash 23.5pc of her pay for extra hours worked. Take off an annual allowance tax charge and she could be working extra hours for no immediate benefit.

On top of that her pension lifetime allowance is likely to be breached if she continues working full time resulting in a further tax charge.

Politicians have no excuse for failing to grasp this issue because a very detailed paper was placed in the House of Commons Library recently. This explains various proposals made by the British Medical Association and the Office of Tax Simplification to overcome the annual and lifetime allowance tax charges. 

The government decision to increase the annual allowance thresholds by £90,000 helped but that is not a solution. Interestingly there is a reference to proposed special rules to help judges on the basis that they are a special case, but what makes judges more special than doctors? In any event, if a tax is to operate it should be applied even handedly.

The civil service operates a “scheme pays” facility in which you can ask the scheme administrator to pay the tax in exchange for reduced benefits. I understand that this also applies for the NHS although it seems more restrictive.

I would be interested to hear from readers with practical experience of this option. Perhaps this would offer a solution for some doctors if made sufficiently flexible. Longer term I hope that we can do away with the whole convoluted system and find a solution that properly encourages endeavour. 

Tax Hacks is written by Mike Warburton, previously a tax director with accountants Grant Thornton, and is published twice a month on Tuesdays. You can email Mike on taxhacks@telegraph.co.uk 

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