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Pension tax rules - impact on NHS consultants and GPs

Published Friday, August 9, 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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Pension tax relief works on the principle that contributions to pensions are exempt from tax when they are made, but taxed when they are paid out. Pension contributions made by individual employees are usually paid out of pre-tax salary, so tax relief is received at the individual’s marginal tax rate. The main limits that apply are the lifetime allowance (LTA) and annual allowance (AA).  At introduction in 2006, the AA was set at £215,000 and the LTA at £1.5 million (Finance Act 2004, s218 and 228). Both were set to increase in stages, with the LTA reaching £1.8m and the AA £255,000 by 2010 (Budget 2004, para 5.45). Since 2010, both allowances have been reduced:

  • The LTA reduced from £1.8m to £1.5m in April 2012, then to £1.25 million in 2014 and £1 million in April 2016. Since April 2018, it has risen in line with inflation and will be £1,055,000 in 2019/20.
  • The standard AA reduced from £255,000 to £50,000 (April 2011) and to £40,000 (2014), From April 2016, there is a tapered AA for individuals with ‘adjusted income’ over £150,000.

Measures were introduced to mitigate the impact of these reductions – for example, enabling individuals to protect a higher level of LTA in certain circumstances and allowing them to carry forward unused annual allowances from the previous three years.

The Government says these changes reduced Exchequer costs and the share of pensions tax relief going to additional rate taxpayers. (Cm 9102, July 2015, para 1.5 and 2.6.)

The impact of these reduced allowances on some public servants – including the senior military, the judiciary, and NHS consultants and GPs – has featured in successive reports of the pay review bodies (See, for example, Cm 9694, Sept 2018, para 3.89-90). The BMA is concerned that the rules are “forcing some of our most experience doctors to retire, reduce their workload, abandon leadership positions and stop covering vacancies.” It has called for a “fundamental review of the current legislation around the annual and lifetime allowances” and has suggested some immediate and medium-term mitigations in the meantime (Letter to Chancellor, 20 April 2019).

The Government said in May 2019 that it was considering additional flexibility in public service pension arrangements (PQ 255267, 21 May 2019). The interim NHS people plan published on 3 June 2019 proposd allowing senior NHS clinicians the option to halve the rate at which their NHS pension grows in exchange for halving their contributions to the scheme. The BMA said this will not solve the problem and called for reform of the pension tax allowances.

On 22 July 2019, the Department of Health and Social Care (DHSC) launched a consultation on introducing more flexibility into the NHS Pension Scheme – in the form of a “50:50 option whereby senior clinicians who expect to be affected by the annual allowance can elect at the beginning of the year to reduce their contributions and their pension accrual by 50%.”

On 6 August 2019, the Government said that the DHSC would launch a further consultation, replacing that launched on 22 July, on a proposal to allow senior clinicians in the NHS in England and Wales to set the exact level of pension accrual at the start of each year and allowing employers the option to recycle their unused pension contribution back into the clinician’s salary:

Starting from next financial year, the new rules would allow senior clinicians to set the exact level of pension accrual at the start of each year. For example 30% contributions for a 30% accrual rate, or any other percentage in 10% increments depending on their financial situation. This would give them room to take on additional work without breaching their annual allowance and facing tax charges. Employers would then have the option to recycle their unused contribution back into the clinician’s salary. (HM Treasury, NHS pensions for senior clinicians: new changes announced to improve care, 7 August 2019)

The Treasury would also "review how the tapered annual allowance supports the delivery of public services, including the NHS".

Commons Briefing papers CBP-8626

Author: Djuna Thurley

Topics: Health staff and professions, Pensions

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