Dr Blogs

Proposed flat rate of tax relief on pensions would increase doctors’ contributions

16 March is the date of the next Budget, when the Chancellor sets out his response to a previous consultation on pension savings.

Possible options on the table include the introduction of a flat rate of pension tax relief, as well as reductions in the pension lifetime allowance (£1 million from April 2016) and annual allowance (£40,000 per annum).

In the current system, you get relief at your marginal rate of income tax (e.g. if you pay 20% income tax, you get 20% relief on contributions, if you pay 40%, you get 40%). Essentially this means that pension contributions are tax free, a position we have had in this country since 1921 to encourage pension saving.

The Government claims that moving to a flat rate of tax relief (somewhere between 25% and 33%) will be fairer as most of the tax relief goes to higher earners. This is a fatuous argument – higher earners, such as doctors, claim more tax relief because they pay more tax!

Essentially the Government wants us to move to a flat rate of tax relief to save more money on pensions and if this measure is introduced, our take home pay will reduce even further to subsidize the lost tax relief; if we go down to a rate of 25% tax relief, for example, every £1000 we contribute to our pensions on a monthly basis, we will have to pay an additional £150.

As doctors, we have already been hit with increased contributions to our pensions, as well as reduced pension value through the introduction of a career average pension scheme and the pegging of the retirement age to the same as the state pension age.

One issue is particularly galling. The Government used the fact that many of us receive 40% tax relief to provide a justification for the introduction of tiered contributions to the NHS pension scheme. Most consultants, for example, are contributing 13.5% – 14.5% of their salaries to their pensions (the highest in the public sector) and the Government claimed that in practice they were only contributing 8-9% after pension tax relief.

If we move to a flat rate of pension tax relief, there is no longer any rationale for tiered contributions and we should be pressing the Government to move to a flat contribution rate to match this.

Please write to your MP as a matter of urgency to protest about proposed changes to tax relief, as well as any further change to the lifetime and annual allowances.

It is time the Government stopped using our pensions as a cash cow!

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