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A Prescription for Disaster

The Excess Pension Contribution Tax Charge

(or how to rid yourself of the most experienced doctors in the NHS)


It must have been a slow day in the office. The Department for Mucking Up the Tax System (“DMUTS” for short) was running short of work. That irritating new body, The Office of Tax Simplification, had just recommended that 150 of their greatest ideas should be scrapped, and the reason given:

“So ordinary taxpayers could understand their tax position more clearly”

The Head of Department (HoD) was furious; two decades of work was likely to be wiped out in a matter of months; where was the joy in having taxpayers actually know what they paid, and why?

The minions sat at their desks and trembled as they had seen something similar before; back in the day, Gordon Brown introduced a TAX FREE amount of £10,000 for ALL limited companies. Then, the HoD went ballistic and got it scrapped post haste. What would he do now?

There was an obvious solution. Governments of every political hue had given tax relief on pensions contributions for decades; that’s a prime target.

The plan

They agreed to cut the limit on the amount you could save each year and still get tax relief.

But that was too simple to understand; “let’s also introduce some rules on how to calculate the amount you’ve invested”.

Better, but not enough! “We have to complicate it further, let’s add in a clawback on the limit for those earning over £110,000 (Ed: this has now increased to £200,000). That should do it.”

“Better still, but you can do more”, came the response.

“OK, so let’s use TWO different measures for income that need to be factored into the calculations and taper the relief for income between those limits as well.”

“Better still, but you can do even more”, came the reply.

“What if we measure the amounts against the limits by reference to an entirely different period of time, so no one will have a clue how we’ve justified the tax raid.”

“Excellent!”, The Head of Department smiled as he imagined the chaos his wonderful team had just caused.

And thus was conceived the “excess pension contribution tax charge” and the “pensions input period”

“A marginal tax rate of 327% should REALLY annoy those horrible tax relief claiming folk,” smirked the Head of Department.

The law of unintended consequences

Of course, what they didn’t realise at the time was that most of the people affected by these changes were the very people they were looking to fund; not Fat Cat private entrepreneurs with vast wealth, but public servants at the very top of their profession, with all the experience and knowledge necessary to train up the next generation and maximise the quality of care while doing so.

The UK now loses more of its Senior Doctors between the ages of 50 and 60 than any other country in the world. The loss of experience, and reduced physical numbers of senior doctors puts pressure on every other doctor, right down to the F1 in their first post after graduation. Staff shortages and a lack of support mean decisions are far more fraught and take longer to implement; patient care and the patients suffer. Not to mention the impact of the health of doctors and other staff in the NHS.

The hit

We have seen tax rates of over 300% of the increased income. The example in the Annex reveals a tax rate of 327%! No wonder many senior doctors are refusing extra shifts, cutting out clinics and even leaving the profession!!

The solution

There is no easy solution.

One option is to ask the Scheme to pay. However, this is effectively a loan which will be repaid by way of a reduced retirement pension.

Another option is to ensure you have claimed the unused allowance from previous years.

Ensure you have claimed for any tax deductible subscriptions, donations or other allowances. You may even like to consider a massive charitable donation to take you below the thresholds.

If you have private income that has caused the issue, you should consider the most tax efficient way structure for that business.

The next step

If you’ve received one of those “dreaded brown* envelopes” (as one consultant described it to me), please contact your tax advisor or accountant. This is particularly important if you receive an excess pension savings charge notice for the first time.

If you don’t have an accountant, or would like a second opinion, please get in touch. They are ways in which the burden can be mitigated, and an option to get the tax paid from your pension. (This requires careful thought and the advice of an IFA with experience in dealing with the NHS scheme).

If you haven’t reached that stage, but would like a second opinion on any tax issue, including a review of your PAYE codes, drop us a line using the details below.

You can reach us at www.numbersukltd.com or through any of the usual social media channels.We even answer the phone at 01752 226084!

Steve Carey is a qualified tax adviser who spends most of his time advising medical and other professionals, including other firms of accountants. You can find him at www.numbersukltd.com

*other colour envelopes are available.


How do they work out the amount of my

annual pension contribution?

The amount of contribution is NOT simply the amount you have paid through your payslips….
Rather, it is taken to be the difference between the deemed value of “your” pension pot at the beginning of the year, and the same value at the end.

The value of your pension pot

Putting bespoke numbers on it should help to provide clarity. We will use a hypothetical senior doctor to demonstrate the issue

Number crunching (assumed)

FactorValue at start of input period
Value at end of tax year
Salary (assumed all pensionable – unlikely)195,000205,000
Years of service2021
Therefore pension entitlement=20/80×195,000=21/80×205,000
Deemed fund value780,000861,008
Lump sum (3x annual pension)146,250161,439
Closing value of pension fund926,2501,022,447
Deemed increase in pension fund*£77,672

*This is calculated as the entitlement at the end of the year less the starting entitlement increased for the rate of inflation. We have assumed a 2% inflation rate for this example.


The increase in deemed pension savings (£77,672) is added to the threshold income (£205,000) to determine if the adjusted income exceeds £240,000. In this case, it clearly does, so the annual pension entitlement is reduced. The excess over £240,000 is £42,672 so the reduction in annual allowance is £21,336, leaving the
annual tax free contribution at just £18,664.

The notional fund has increased by £77,672, which is £59,008 more than the (reduced) allowance. Tax is charged at 45% as this taxpayer has income of over £150,000.
Tax of £26,554 is due. Add to that the 14.5% pension contribution, income tax at 45% and NIC at 2%, you have a total levy of 62% on the payrise of £10,000, leaving just £3,800 increase in cash taken home, and an extra tax bill of £26,554.

So, an extra year of service and a small payrise actually costs this individual over £22,700 in lost take home pay!

A fine reward for another year of service to the NHS and taking on extra responsibilities.

Steve Carey
October 2021