Higher-earning public sector workers could face additional pension tax bills as a result of the recently announced pay rises.
This is because the enhanced pay, confirmed by government on Monday (July 22), could see more high earners breach the annual and lifetime allowances, according to accountancy firm Blick Rothenberg.
Any pension contribution paid by public sector workers over £10,000 per year is treated as a taxable benefit by HM Revenue & Customs and must be declared on an annual tax return.
The lifetime allowance – the limit on the amount of money that can be saved in a pension without triggering a tax charge - currently stands at £1,055,000.
Workers who exceed the lifetime allowance could face a tax bill of 55 per cent on their excess pension contributions and Blick Rothenberg warned that the pay rises could see more workers, such as senior civil servants and consultants, be put in that position.
Robert Salter, an employment and expatriate tax specialist at Blick Rothenberg, said: “This lifetime pension allowance has already been blamed for encouraging many consultants and GPs, for example, to retire ‘prematurely’, to avoid the relatively punitive taxes that they would otherwise face on their marginal pensions and one, unintended consequence of the pay rise might therefore be that more senior public sector employees also look to retire prematurely in the coming months.”
According to official data published in May 2019, the number of public sector retirees (NHS, civil service or teachers) who receive more than £100,000 from their pension pots a year increased by 320 per cent in seven years, from 117 people in 2010/11 to 375 in 2017/18.
According to a Freedom of Information request to the three main government pension schemes by charity Intergenerational Foundation, the number of public sector workers receiving annual pensions of more than £50,000 has more than doubled during the same period.
Those receiving pensions higher than the UK’s average annual salary of about £28,600 also increased by 47 per cent, up from 78,000 in 2010/11 to 115,000 in 2017/18.
Blick Rothenberg's warning comes as the government published a consultation this week (July 22) asking stakeholders what changes it should make to the rules governing the NHS Pension Scheme to stop a large number of doctors retiring early or cutting their hours.
The government is proposing a new pensions option, which will allow doctors to build their NHS pension more gradually over their career without facing large tax charges.
The introduction of a 50:50 option would allow clinicians to "halve their pension contributions in exchange for halving the rate of pension growth".
Newly appointed prime minister, Boris Johnson, previously vowed to make changes to the pension tax issues that are affecting doctors and public sector workers, in particular raising the lifetime allowance cap.
He told the Telegraph: "This is something I have raised repeatedly, the £1.1m pension cap, which is affecting doctors and other people.
"It’s obviously wrong, it’s causing a real problem, I have raised it repeatedly with the Treasury and they keep telling me they’ve addressed it but the headlines show it has not been addressed, and we will fix it, we will fix it."
amy.austin@ft.com
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