Public sector workers could face additional pension tax bills

Higher-earning public sector workers could be subject to additional pension tax bills as a result of pay rises announced by the government last week (19 June).

According to accounting and tax advisory firm Blick Rothenberg, the extra tax bills on DB pensions could cause some higher-earning public sector workers, such as civil servants, to retire early.

Workers with a lifetime allowance of over £1.06m for the 2019/20 tax year could face a tax bill of 55 per cent on their excess pension contributions, compared to 20 or 40 per cent that a typical pensioner would pay on their pension income.

Blick Rothenberg employment and expatriate tax specialist, Robert Salter, said that although the pay rose will be “welcomed by many employees in this sector”, it may have “unforeseen surprises for higher-paid employees”.

He continued: “Many higher-earners, who typically benefit from defined benefit pension arrangements, could face an additional tax charge on the contributions that they and their employers make into their pension scheme each year.

“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.”

Any pension contributions paid by public sector workers in excess of £10,000 per year are subject to taxation.

The pension tax crisis in the NHS has already led to an increase in patient waiting times and what the British Medical Association described as a “major workforce crisis”, as senior doctors were unwilling to take extra shifts.

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