Fiona Tait: Do doctors deserve special treatment on annual allowance taper?

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

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Comments

There are 22 comments at the moment, we would love to hear your opinion too.

  1. John Hutton-Attenborough 2nd April 2019 at 3:56 pm

    Go back to why this was introduced in the first place. It was not to punish members of final salary pension schemes (not just the NHS)which is precisely what it is now doing. DC members have adjusted their actions accordingly which many in DB schemes cannot do. It is just plain wrong on every front.

  2. If we want the best NHS possible, we need to keep the best qualified staff. With many doctors and consultants seeking early retirement because of the punitive pension tax implications, we do need some joined up thinking from Government.

  3. Fiona, is it not that if their pension and thus pension input amount which leads to a potential AA charge is based on contractual and not “overtime pay” then they are going to have an AA allowance charge irrespective of their overtime. Thus if the overtime was pensionable they’d be making the problem worse as the input amount would be greater. Thus they are not disincentivised not to work the extra amounts as this is at least providing income to pay against the already accrued AA charge. Having said that, I agree that the system is broken but that’s what happens when successive Chancellors tinker with legislation they won’t be around long enough to see the unintended consequences of.

  4. Unless of course the additional income results in a tapering of the AA which would have the effect of increasing the AA charge of course.

    • Yes this is the issue. For some the extra pay pushes them over the taper limit, and as pension contributions are fixed they cannot reduce them. Sorry if that was not clear.

  5. Fiona, I would make a few points.

    1.) The definitions of pensionable salary for all 3 main NHS schemes are the same, however the 1995/2008 schemes are final salary and the 2015 is a CARE scheme.
    2.) The vast majority of problems with AA tax charges occur for members who have significant deferred benefits within the 95/08 schemes and who receive a significant pay rise, because then their pension benefits increase by the same amount as their salaries. Paying a tax charge when your annual pension just jumped by anything up to £10,000pa or more in one year is not unreasonable, when it’s the tax payer footing the bill.
    3.) As you have already stated, overtime is not pensionable (assuming they are already full time) so doing overtime and AA tax charges are utterly unrelated other than if that overtime causes AA tapering.
    4.) Most doctors who they want doing “overtime” tend to be younger and therefore not as well paid, so AA charges are much less of an issue and they are unlikely to get tapered.
    5.) Using scheme pays is less attractive for younger members, however given that it will also reduce potential LTA tax charges (by reducing their benefits) whether it’s a good idea or not can be very complicated.

    Flexibility of pension packages by definition will not work with a defined benefit scheme, simply because their actual contributions have nothing to do with the AA usage.

    So short of offering yet another NHS pension scheme on a defined contribution basis as another option, the option to tailor their package does not exist and would be exceptionally hard to introduce.

    I do agree that tapering the AA creates a massive degree of complication for those in DB pensions who are high earners, so would it not be better to be putting forward potential solutions to the problem?

    E.g require all DB schemes to issue a statement of AA usage each year, so at least the member knows how much they used? Also require the scheme to tell them what their threshold and adjusted income was for their employment by the NHS alone, so they have some clue whether they might breach it?

    Maybe require DB schemes to offer something like a calculator we created which auto calculates all these things for any person in the scheme and allows them knowledge of what their situation is? Whilst also telling them about their net benefit situation if using scheme pays and if paying directly, whilst also factoring in potential LTA charges and income tax?

    Heck even arguing to show why tapering the AA is a bad thing, showing how many people may be breaching it and not notifying because they don’t know and why it’s a perfect example of the government over complicating things?

    On a final note, would it not be better to help educate NHS staff as to how valuable their pension benefits are, so that they actually understand the huge value that pension scheme adds to their “package”? Whilst also highlighting how and why proper advice can be very beneficial to them?

    • Could not agree more with the education point. With regard to the overtime the issue I was trying to highlight is where the extra salary pushes them over the taper threshold. This is a positive disincentive to work. And yes, my preference would be to get rid of the taper entirely.

  6. Agreed – it was merely a tax grab by Osborne in the belief that pension turkeys would hiss least when plucked. I am now aware of a number of senior medics who plan to retire in their 50s at the peak of their abilities in order to avoid punitive taxation.
    They should not represent a special case, however, as their voices will eventually be needed to address the inequity for all sufferers of this ill-thought through legislation.

  7. The allowance limits are problematic, and ill thought through – but to suggest that Drs are in some way special (as regards pensions) is a little disingenuous. Drs become Drs because they want to be Drs in the main, and those are the ones we want. I do not want surgery from the ones who are just there for the money thanks.

    Drs are treated poorly in all sorts of ways around administration, but the money isn’t bad.

    So sort out the NHS pension scheme so they produce figures in real time (not exactly tricky, they have these new things called calculators and everything) and offer Drs the choice between pay the annual allowance charge, or only accrue to the annual allowance. Any who can do the maths will pay the charge.

  8. (Hello Fiona!)
    Problem is, this would be the thin end of a wedge. If you exempt NHS staff, why not members of HM Armed Forces? Or Senior Civil Servants? I’d suggest there is more of an argument to increase the LTA for members of these kind of public schemes.

  9. Trevor Harrington 2nd April 2019 at 5:22 pm

    We must remember certain facts.

    The NHS pension scheme, in common with all public sector pension schemes, is massively over generous to those in the higher pay bands, and the cost to the rest of us is actually financially crippling.

    Quite clearly, there are very few people in the private sector who have anything like enough contributions to their private or company pensions in order to even dream of early retirement before their 60s. In fact most have to go to age 65 and even then they have substantially insufficient retirement income.

    The employer contribution (you and me)to the public sector pension often exceeds 25% of salary, and in some instances (the Police) actually exceeds 30% of salary.

    It is travesty of social justice and equality that people in the public sector are allowed to access their occupational pension benefits before age 65, often with spurious imagined illnesses, which miraculously disappear the day after they have retired. This is particularly and chronically unfair, when everyone else is so dependent on their state pensions, which have been so dramatically reduced, and their retirement ages extended.

    Not only is the tax on excess pension contributions perfectly justified, but we should also consider a retirement pension income super tax, at say 60%, on all public and private pensions in payment accumulating to more than £40,000 per annum. Of course, the State Pension should be ring fenced from this calculation.

    Provided that these extra revenues are used to re-instate the state pension, and reduce the age back to age 65, it would be a perfectly fair and justifiable tax.

    And please do not tell me that all these higher paid public sector employees, be they local Government, teachers, police, firemen, or indeed NHS … are over stressed, hard working or under paid. I have worked as an Adviser for 37 years, and have had many such people from all those professions as clients … and they most definitely are NOT. The occasional one or two, perhaps, but 95% of them are having a very easy life in comparison to the private sector … thank you very much.

    • I agree totally that public sector schemes are very generous and the rest of us would be glad to get them. What I obviously haven’t put across is that there is an immediate issue with working extra hours and the AA taper. This is having the immediate effect of preventing doctors from taking on the extra hours that the NHS needs to function properly.
      Looking at the overall benefits package for the public sector is a longer term issue.

  10. Just remove the AA, simples

  11. There does seem to be a really straightforward method of resolving this issue, as well as a number of other associated issues.
    This is to move to a system whereby DB schemes are subject to a Lifetime Allowance but not an Annual Allowance or Tapered Annual Allowance, and DC schemes are subject to just an Annual Allowance and not a Lifetime Allowance.
    I would, however, argue that the factor used in converting DB scheme pensions (whether private or public sector) needs to be amended to better reflect the notional cost of providing them!
    This would remove the issue of DB scheme members not knowing if a promotion late in the scheme year would suddenly lead to a big tax bill due to breaching the AA.
    It would also remove the penalty on DC scheme members from good investment performance.
    The Tapered Annual Allowance is just an abomination. I have dealt with solicitors and barristers in the past who have not made great pension contributions in their early years as they have undergone training, bought houses, started families, etc. who have then been given the news that as they have now made Partner or whatever and their adjusted earnings are over £150k they can only pay £10k per annum gross into their pension!

  12. The problem was featured on Money Box on Radio 4 on 30 March. It is at https://www.bbc.co.uk/sounds/play/m0003sml

    The relevant article is at about 13:30 into it.

    The key issue is that it creates an effective tax rate in excess of 100%.

    So a doctor must choose between paying for the privilege of working or leave the patient to suffer or worse.

  13. Jonathan Wileman 3rd April 2019 at 10:20 am

    @Kevin Neal. Agree with you 100%. This seems the obvious solution to me too. DC schemes are contribution based so control by limiting contributions. DB schemes are outcome based so control by limiting outcomes. They are so different in their nature that it makes no sense to try to control them using the same mechanism.

  14. Julian Stevens 3rd April 2019 at 7:26 pm

    The fact that the overall AA tax charge can sometimes be large enough to cancel out the entire amount of a (doctor’s) overtime payment clearly indicates that the present system is ridiculous. They may as well just say No, on the grounds that working the extra hours will not earn them more money but actually cost them money. They’d be better off doing the extra hours for no pay at all.

  15. It is not true that those in private sector DB schemes do not face similar problems to NHS staff. The tapered allowance should end. It penalises hard work and ambition, a stealth tax which taxes a future benefit which will be taxed again and an own goal for the Treasury when applied to public sector scheme members.

  16. Hi Fiona, Great rticle thankyou. I have been actively avoiding advising NHS high earners for 3 years now !!!!. Seriously though , could you quickly (bad day today I know !!)give an example of a doctor earning £110,000 a year, getting promotion to £130,000 per year, with lets say 10 years service aged 50. Ignoring split schemes etc. Kind regards, Piers

  17. Andrew Cartlidge 8th April 2019 at 2:07 pm

    Why should hospital consultants or GPs be a special case? They are amongst the best paid state employees – with the most generous pension provision, subsidised by taxpayers who are usually less prosperous than they are. Those subsidising them most heavily are usually victims of the lifetime allowance themselves. The sanctification of any group of workers within the tax system is a perversity. If the NHS were debated as a government service, instead of as a national religion, some sense might enter into the continuous funding debate. NHS doctors and nurses already earn far more than those employed in the ‘model’ systems of Europe.

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