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Pension tax rules - impact on NHS consultants and GPs

Published Wednesday, December 18, 2019

This short note focuses on the current debate about the impact of pension tax rules on some senior NHS staff. The broader issues are discussed in Library Briefing Paper CBP 5901 Restricting pension tax relief.

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This note looks at the concerns about the impact of the ‘tapered annual allowance’ on some senior NHS clinicians and GPs.

Pension tax rules

The annual allowance (AA) limits the amount of annual pension savings that benefit from tax relief. The standard AA is now £40,000, down from £255,000 in 2010. To mitigate the impact of reductions in the AA, the Coalition Government legislated to allow people to carry forward unused allowances from the previous three years.

There is also a tapered AA, introduced in April 2016, which operates to reduce an individual’s AA, by £1 for every £2 of ‘adjusted income’ (essentially, total taxable income plus the real growth in value of pension rights over the year) over £150,000, down to a minimum of £10,000.

These rules apply across pension schemes in the public and private sectors. However, the nature of work - with consultants taking on additional work, often at short notice, to cover service pressures – means there has been an impact across the NHS. The tapered AA is having a greater impact in 2019/20, because this is the fourth year since its introduction, meaning that the capacity to carry forward unused allowances from previous three years is greatly reduced (DHSC consultation, July 2019).

Plans for NHS pension scheme flexibility

The DHSC consulted earlier this year on proposals to allow senior medical staff to opt to build up pension benefits at a lower rate, in order to reduce the risk of incurring a tax charge. The BMA described the proposals as a ‘sticking plaster’ and said that the pension tax rules needed to change - in particular, that the tapered AA should be scrapped.

On 18 November 2019, NHS England Chief Executive, Simon Stevens, asked Health Secretary, Matt Hancock, to agree to a plan to allow the NHS to compensate senior clinicians incurring a pension tax charge in 2019/20. In support, he included evidence from the Academy of Royal Medical Colleges, which said that its findings showed that “service is being put at risk because of the current pension taxation position.” The Secretary of State for Health agreed to the proposal for reasons of “urgent operational necessity” and on 7 December confirmed that this would be a binding contractual commitment.

The NHS England explains that “clinicians who are members of the NHS Pension Scheme and who as a result of work undertaken in this tax year (2019/20) face a tax charge in respect of the growth of their NHS pension benefits above their pension savings annual allowance threshold will be able to have this charge paid by the NHS Pension Scheme (by completing and returning a ‘Scheme Pays’ form before 31 July 2021).”

The BMA said it was reassured by this but that urgent reform of the pension tax rules was needed. On 17 December, it called for Scottish doctors to have the same option, in addition to the short-term scheme already offered by the Scottish Government.

Review of pension tax rules

HM Treasury said in August that it would “review how the tapered annual allowance supports the delivery of public services, such as the NHS.” On 18 December 2019, the DHSC confirmed that it would “carry out an urgent review of the pensions annual allowance taper problem” which would report at the Budget.

Commons Briefing papers CBP-8626

Author: Djuna Thurley

Topics: Health staff and professions, Pensions

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