Parliament has debated the annual allowance taper and ruled out creating a tax exemption for NHS scheme members.
On the face of it, many would say well-paid NHS staff are wealthy enough to foot the AA bills and should suck it up like everyone else. But do NHS doctors and consultants deserve different treatment?
Government is the employer
When the AA taper was first introduced many well-paid individuals with private sector employers were able to negotiate a cap on their pension contributions in exchange for alternative benefits, most commonly cash. This is not possible within the NHS and it is clear that the government is thinking more as a legislator than an employer on this issue.
Defined benefit schemes
Members of defined benefit schemes have many advantages, but they have little or no control over their pension contributions. In fact, they are unlikely to even know what they are.
The amount that is tested against the AA is the increase in the value of benefits between the start of the tax year and the end of it, more often referred to as the accrual. This is not easy to work out, particularly if earnings are continually fluctuating due to shift work or overtime.
There is a further complication with the NHS because the pension scheme was given an overhaul in 2015. Hence why most doctors are members of two DB schemes – a pre-2015 scheme, either the 1995 or 2008 scheme depending on when they joined service and which they opted in to, and the 2015 scheme. Both schemes have different pensionable salary definitions and accrual rates.
Doctors and consultants therefore rely heavily on the scheme to let them know what their accrual has been and if they have breached the AA each year, something the NHPS is not always able to do accurately or on time.
A further difficulty is that while each scheme must inform any member if they exceed the AA via accruals in their scheme, there is no requirement to notify if neither of the separate accruals exceed £40,000 but the total across both schemes does.
As a result of all this, doctors may only find out that they are due to pay an AA tax charge when it is too late to do anything about it, including choosing the ‘scheme pays’ option.
“Scheme pays” is treated as a loan against future benefits
If an individual’s AA tax charge exceeds £2,000 they can ask the scheme to pay the charge for them via a deduction of benefits. This election has to be made by the 31 July for the preceding tax year, As mentioned some doctors will have missed this deadline due to delays in documentation and are therefore faced with paying the tax bill out of earned income.
Even using the “scheme pays” option is not always an advantage. The rules within the NHPS offset the payment against scheme benefits by means of a loan, which is repaid with interest at retirement. This means that while it can work well for members who are not far off retirement, the compound effect of interest can result in a substantial reduction for younger doctors.
Reliance on overtime and shift work
This dependence on overtime and shift work means doctors are under constant pressure to take on extra duties and overtime, if they refuse patients will suffer. The definition of pensionable earnings in the NHPS is “contractual pay” and does not include those earnings from overtime, the result of which is the extra work generates income which IS taxable but NOT pensionable. If it was at least pensionable they would get a proportion of the value back at retirement however, as it stands the overall AA tax charge can sometimes be large enough to cancel out the entire amount of the overtime payment. The result is a situation where the doctor is paying for the privilege of working harder.
And this is the last, crucial difference. If they are not incentivised to work the NHS will not be able to provide the service today’s society needs.
We should therefore accept that doctors are different, and that they are disproportionately hit by the current tax rules.
What I cannot see is any justification for adding to pension complications by having different rules for different professions. The solution lies with either changing the NHS scheme rules to address this issue or changing the overall pension tax rules. Neither option would be quick or easy in Brexit-hit Britain, but the system is broken and must be fixed.
Fiona Tait is technical director at Intelligent Pensions