The NHS Pension Conundrum

Alex Harrington

Firstly, in order to provide a bit of an overview, it would be prudent to discuss what the ‘Annual Allowance tax charge’ is.

The Annual Allowance charge is a tax at your marginal rate, on the excess of your pension input over your Annual Allowance. An individual’s pension input is determined by the contributions made (for those within defined contribution schemes) or the overall growth in benefits (for those within defined benefit schemes).

The standard Annual Allowance is £40,000 except for those that are subject to tapering legislation (I will discuss this in further detail later on). If your pension input for the respective tax year is in excess of your Annual Allowance, you may carry forward any unused allowances from the previous three tax years to effectively cover this. Any resulting excess thereafter is subject to taxation at your marginal rate.

Although the government aren’t necessarily aiming the message of ‘saving for the future’ at high net worth individuals - it does seem strange that alongside a backdrop of auto-enrolment and increased contributions, others are being hit with substantial tax charges.

Whatever your political persuasion or view on this matter, it’s more pertinent to look at the facts of the issue and their associated consequences, as opposed to how equitable the taxation system is or should be.

Recently, the impact that Annual Allowance charges are having upon doctors within the medical profession has been well publicised.

In certain parts of the country, hospitals have had to significantly scale back services, in some situations having to cease the provision of certain care/treatment altogether. In addition waiting lists for consultation/surgery have also increased drastically.

However, doctors cannot be held to account for this additional strain on the National Health Service. Doctors are in a situation where they are having to cut back their hours, and decline overtime, because to take on this work would adversely affect them financially. In some situations working extra hours will earn doctors little to no extra money, with the most extreme case being that they are actually paying to work!

There are a few issues with the system as it is:

The Tapered Annual Allowance
This was a newly Introduced measure as of 2016/17 that saw the standard Annual Allowance of £40,000 potentially reduced down to a maximum of £10,000 for higher earners. For every £2 of ‘adjusted Income’ (being total income plus pension growth) earned above £150,000, £1 of Annual Allowance is tapered down.

The tapering rules only take effect where your ‘threshold income’ exceeds £110,000 (being total income less employee pension contributions). One of the pitfalls here is that a singular £1 earned over the threshold of £110,000, can result in a reduction in your Annual Allowance, and subsequently a significant Annual Allowance charge.

Whilst many called for the abolition of the Tapered Annual Allowance, this hadn’t looked like something that Theresa May’s government was likely to entertain, with former Chancellor Phillip Hammond suggesting it is ‘necessary to deliver a fair system and protect the public finances’. He has further suggested that the Tapering legislation is worth in the region of £6 billion tax revenue for the Treasury. Therefore if the Tapered Annual Allowance were to be scrapped, this is tax revenue that would otherwise require collecting by other means.

Problems with forecasting
The fact that pension growth is linked directly to earnings (with the NHS pension scheme being a defined benefit scheme as opposed to defined contribution) creates a planning issue in terms of mitigating charges. Doctors are not necessarily aware of how much they are likely to earn during the year, for example GPs are reliant on the partnership accounts being drafted for their pensionable profits to be ascertained. As a result it is difficult for Doctors to know whether they will be subject to tapering, until it’s too late.

The situation is therefore not as simple as making select contributions under a defined contribution scheme.

Options available
At present there are very few options available to those incurring charges. Firstly, in order to mitigate charges, members can opt in and out of the scheme, effectively regulating the level of their earnings that are pensioned. This can be quite a cumbersome exercise (in terms of pension administration), and obviously whilst out of the scheme pension growth is foregone, along with other benefits such as death in service. Alternatively those that choose to stay in the scheme and pay charges arising can opt to make a NHS Pension Scheme Pays Election (where the scheme pays your charge to HMRC on your behalf in exchange for a future reduction in benefits). Both of these have potentially lasting implications and it’s recommended that the requisite financial advice is sought before any action is taken.

What does the future hold?
Following increased lobbying over the last few months, Theresa May’s government conceded that more flexibility was required, subsequently proposing a ‘50/50’ scheme whereby members can halve their contributions, in turn accruing only half the pension growth. This did not receive much in the way of support from the medical community, with the HCSA, and British Medical Association declaring the measure as ‘inadequate’.

However, during his campaign for the Conservative Party leadership, the now new Prime Minister Boris Johnson promised to ‘fix’ the pension issues in relation to Lifetime Allowance charges. At this point it remained to be seen as to whether this would extend to legislation surrounding Annual Allowance charges, however as I am writing this, more positive news has appeared on the horizon. The Department of Health and Social Care announced on the 7th August that a new consultation will take place this summer, where the new proposals hope to provide a fully flexible system whereby individuals can set the precise amount of contributions paid into their pensions, and therefore the respective accrual rate. In addition to this new approach there is a suggestion that employers will have the option to make payment of the contributions foregone into the consultant or GP partner’s salary.

The government hopes that these new proposals will allow medical practitioners to take on additional work without having to suffer the burden of additional tax charges, with NHS services reaping the rewards thereafter.

Matt Hancock, Health and Social Care Secretary has said ‘NHS doctors do extraordinary, life-saving work every day, and they should not have to worry about the tax impacts if they choose to go the extra mile by taking on additional work to help patients. These comprehensive proposals will give doctors the pension flexibilities they have called for and need to make sure they are rewarded for extra work. We are taking immediate action and I hope these flexibilities will encourage our top NHS staff to fulfil the dedication of their mission: to care for their fellow citizens in time of need.’

Furthermore, new chancellor Sajid Javid has suggested that the Treasury will go even further, by reviewing the Tapered Annual Allowance, saying ‘we’ve listened to concerns and will be reviewing the operation of the Tapered Annual Allowance. This will help to support the delivery of our vital public services’.

Further details around the consultation will be revealed in the coming weeks, however the situation certainly seems to be heading in the right direction.


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