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Should the pension tax system be changed to solve NHS staff problems?

Michael Klimes looks at what can be done to ease the tax burden of NHS doctors

With politicians under mounting pressure to reform the pensions of senior doctors, questions of fairness are under the spotlight

Chancellor Philip Hammond raised the eyebrows of advisers last week when he stood up in parliament and ruled out scrapping the tapered annual allowance. He argued it is necessary “to deliver a fair system and protect the public finances”.

He made the point in response to questions from MPs about senior NHS clinicians’ tax implications from the tapered annual allowance and annual allowance. They pointed out both allowances are forcing senior NHS doctors to retire early or do less work, and the government should step in to correct this problem.

Hammond went on to defend the current pension tax system as broadly fair because allowance breaches only affect the highest earners.

He also said the tax from the various allowances is expected to deliver £6bn in revenue a year.

Yet he did acknowledge there is some evidence the annual allowance charge is having an effect on retaining high-earning clinicians in the NHS. He added: “I am in discussions with the health secretary [Matt Hancock] about how to provide additional flexibility for NHS doctors affected by the annual allowance tax charge and he will make an announcement as soon as possible.”

Hammond’s view that the pension tax system is fundamentally sound, and the government has to balance the needs of the NHS against wider society, is worth exploring.

It quickly emerges that what people view as fair on pension benefits and tax relief is informed by their own circumstances. Similarly, these circumstances and the politics that emanate from them have also evolved.

Experts have widely different beliefs on whether the Treasury should even consider action to soften the blow of pension tax on NHS doctors, and the policy options that should be considered.

Time for action?
The political pressure on the government to take some type of radical action has been growing steadily over the past few months. In April, the British Medical Association wrote a strongly-worded letter to Hammond, warning doctors will start to reduce their working hours unless reforms are made to the NHS pension scheme.

At the time, BMA consultant committee chairman Dr Rob Harwood said: “Given the refusal of both the government and NHS employers to take steps to rectify or mitigate this, it is now our responsibility to inform our members that current regulations, particularly the annual allowance and tapered annual allowance, are disproportionately and unfairly impacting them.”

The BMA’s line about the annual allowance and tapered annual allowance disproportionately hitting its members has political resonance.

It draws attention to the assertion that high-paid NHS clinicians are being taxed in such a way that is unfair relative to other professions.

The line also puts an onus on the government to make a special dispensation in favour of doctors, since they provide essential public services.

In a way, the background noise is favourable for the health service as, last summer, the government promised to spend an extra £20bn annually on the NHS by 2023. Other politicians have issued repeated statements about supporting the health service after years of austerity and the more recent challenge of Brexit.

Former politicians such as Steve Webb have weighed in on the issue, with the ex-pensions minister recently calling for the Treasury to abolish the tapered annual allowance as quickly as possible.

Webb, who is now Royal London director of policy, says: “If the Treasury believes that higher earners are getting too great a share of the total cost of pension tax relief, it does not follow that the absurd complexity of the tapered annual allowance is the only answer.

“The tapered annual allowance has a ridiculous ‘cliff-edge’ which can cause marginal tax rates over 100 per cent and creates huge uncertainty for people who cannot predict what their total taxable income is going to be by the end of the financial year.

“When NHS consultants are turning down shifts because of the tax consequences of doing additional work, something has gone badly wrong, and tinkering with the NHS pension scheme will not resolve the problem.”

He adds: “Limiting tax relief for the highest earners could be better achieved by abolishing the tapering of the annual allowance and simply having a modest reduction in the across-the-board annual allowance to offset any lost revenue.

“This would make the tax system simpler and more predictable; two features that have been sadly lacking in recent changes.”

Adviser view

Nigel McTear
Director, Signpost Financial Planning

I struggle to see why one group of workers such as NHS doctors should be given a preferential pension tax treatment to other workers.

This issue highlights two things. Firstly, the NHS defined benefit scheme is miles more generous than most others; secondly, that limiting contributions will simply result in pensions that cannot support people in
old age.

There needs to be a rethink about what fair looks like, and defined contribution schemes need an equal treatment on the lifetime allowance relative to DB schemes.

‘Hammond is right’
Clearly, Webb is in the camp that thinks the NHS crisis deserves special attention from lawmakers, given the value he places on its role in society.

But there are others who do not consider it fair to make a rule change to placate a minority facing a tax problem. There is also the dilemma that as soon as you make a change for one group in society, that inevitably leads to calls from others to have the rules written in their favour as well.

James Hay head of technical support Neil MacGillivray says: “It’s not often that I say this, but I agree with the chancellor. The pension scheme for NHS doctors and GPs should not differ from others for two simple reasons.

“Firstly, they are members of a very generous pension scheme, one that most can only aspire to, which is unfunded and is therefore underpinned by the tax-paying public as a whole.

“Secondly, it would be unfair to facilitate exemptions for a relatively small group of individuals. If the chancellor were to treat the doctors and GPs as a special case, this would simply lead to other public sector employees advocating for the same treatment. Any changes cited would need to be fairly rolled out to all.

“For those doctors and GPs who find themselves in this situation, it is suggested they perhaps seek independent financial advice as the adviser may be able to propose options that could mitigate the tax charge.”

Expert view

Confusing tax charges erode trust in pensions

The tapered annual allowance is a complex issue and it impacts more than just high earners because of the fear that is created by uncertainty for all. The headlines show trusted members of the community, such as doctors, getting unexpected tax charges on what is supposed to be a benefit provided to them, and this will erode trust in pensions generally, which I am sure isn’t the intended purpose of this test.

Making changes to any legislation just for a single profession or pension scheme would be admitting that the policy is fundamentally flawed, and ministers are unlikely to do this. In addition, it isn’t just members of the NHS scheme that are having these issues; other high earners in defined benefit schemes will be as well.

The difference is that many other pension schemes offer alternatives or provide a clearer way of dealing with scheme pays.

If scheme pays were clearer in the NHS, such that it showed a pending debit in pension terms rather than a loan amount, the member would be able to determine the impact of this on both their pension in retirement and their lifetime allowance.

Claire Trott is head of pensions technical at St James’s Place Group

Wider reforms needed?
Some commentators believe the experience of doctors within the NHS is evidence of how complicated the pension tax system is, and could be used to spur wider reform.

Intelligent Pensions technical director Fiona Tait says: “The NHS issues have simply focused a spotlight on the underlying problems with the annual allowance taper. The taper should be removed or at the very least rethought because it is artificial and unworkable, and not because of the effect on a single group of workers.

“I would like to see a return to the principles of simplification. Instead of a plethora of different allowances and tapers, I would prefer to see a single, lower annual allowance which affects everyone.

“This would still have a greater proportional effect on high earners as they are essentially the only ones who can afford to contribute up to £40,000 in one tax year.”

Tait also argues it is critical to understand the connection between related but distinct matters.

She adds: “There are two issues at play here: the implementation of the annual allowance taper and the reward structure of the NHS.

“If the issue is primarily affecting one group of employees, then the solution lies with that sector.

“If, as I believe is the case, the NHS issues are simply an example of a wider problem, then that is the time for the government to take action.

“Pensions are very long-term savings vehicles and many unforeseen issues have arisen when changes are brought in without the input of those who must implement them.

“A clear exception to this is the automatic enrolment initiative, which was designed by an independent commission with cross-party support.”

It appears any action the government takes to resolve the NHS issues could be fraught with difficultly, as there will always be a constituency that finds something unfair.

Curtis Banks pensions technical manager Jessica List says: “Wider changes to the annual allowance and lifetime allowance, and greater efforts to help people understand how their pensions work, could help all savers and not just doctors.

“The difficulties facing doctors have helped highlight that the current pension tax system does not always work to incentivise saving and is prohibitively difficult to understand.

“However, these issues are not exclusive to doctors. If significant changes are made to address these issues, they should affect all savers.

“Adding to already complex rules with further layers of exemptions and provisions for certain groups will not help in the longer term.”



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There are 12 comments at the moment, we would love to hear your opinion too.

  1. Andrew Cartlidge 31st May 2019 at 11:30 am

    Doctors have a problem by virtue of an exceptionally generous defined benefit pension scheme largely funded by (poorer) taxpayers. Consultants’ private earnings/supplementary private pension provision exacerbate their fundamental problem of ‘pension prosperity’ which most taxpayers can only dream of. Our complex pension system needs substantial reform – not least in the interests of simplicity and overall fairness. The suggestion that doctors should be treated more advantageously than other members of society under our pension/taxation system is an outrageously unfair one. Higher earners all now wrestle with the problem that H M Treasury actively deters them from making adequate pension provision and heavily penalises those who cross the line in terms of what H M Treasury arbitrarily considers ‘fair’. The taxation system should not tax supplementary earnings or pension benefits out of existence – ALL higher earners need an incentive to go to work and HMRC will collect more tax if they have it. Hammond has achieved a return to the 1970s and Dennis Healey rates of taxation and should be dismissed forthwith – as it is not what voters expect from a Conservative government.

  2. John Pilkington 31st May 2019 at 4:15 pm

    Wrong heading.
    The reason the pension tax system should be changed is to give everyone the incentive to save, not just to protect high earners in the NHS.

  3. Paul Johnston 31st May 2019 at 4:34 pm

    As I see it there is a problem and the fix is not attatractive to HMRC. THe Pension SCheme is part of the pay and conditions but a pension is payable in the future and the amount that a beneficiary may receive is based on his or her life expectancy in the future, even the fact that her or she may never receive it. Tax is payable on increase in value. If one looks at other high earners the way this is dealt with is by reducing contributions/benefit and increasing salary. But doctors etc pensions are paid by the next generation so the government would probally not be amenable to this idea. Perhaps a non-contributitory scheme with lower pension benefits could work. Ignoring all the other comments we need these doctors etc to continue working and carrying on extra clinics to treat sick folk. Those that I deal with are already refusing to do extra clinics because of these rules so Mr Hammond has to come up with a fix. This is a problem when the treasury officials who come up with the taxation ideas dont have the knowledge of the long term implications. Perhaps more should have to work in the private sector

  4. Can’t agree more with the comment above. Public sector staff with DB pensions that very few in the private sector can even dream of (and which we are paying towards from taxes) ask for further tax advantages. Get them all on DC and if they are then up to the annual or lifetime allowance they can take a cash payment in lieu – problem solved. If this isn’t allowed, change the scheme rules/contracts of employment. Interesting that all this talk of austerity doesn’t see less money being spent on DB pensions provision for public sector employees. Maybe it’s just a question of priorities. Same sort of arguments currently being raised by public sector unions in the higher education sector. Cost of continuing DB provision becoming unaffordable – union answer, just continue with current unaffordable system for employees and ask government (i.e. you and me) for more money. Almost like flat earthers.

  5. No, the system should be reviewed for all, Get ride of the life time allowance for starters, tax them on imputes by all means. It will change as politicians will eventually work out is likely to effect them.

  6. Julian Stevens 2nd June 2019 at 4:15 pm

    In just what way is applying the TAA to highly paid NHS clinicians who enjoy an expensive, gold-plated and fully index-linked pension scheme unfair relative to other professions? The same rules should apply to everyone.

    The TAA (and the LTA) should be scrapped either for all (my preferred option, even though neither presently or will affect me personally) or for nobody. There is no case for allowing certain public servants preferential treatment but continuing to clobber others.

    As others have opined, Hammond is the most left wing Conservative chancellor in history and, given his refusal to tackle to ludicrous complexity and limitations of the current pensions framework, not one of the most competent or responsible either.

    Why, for example, will he not reinstate pension contributions insurance (WoP) and the allowance of pension term insurance (the cost of which could be limited to a percentage of ongoing contributions towards retirement benefits)? I see no remotely sound case for not doing so, least of all on the grounds of lost tax revenues. And why will he not countenance the issuance of specially high yield gilts available specifically and only to annuity funds?

    If the AIA must remain, leave it at that and scrap all the other patently unfair and confidence-damaging restrictions on retirement funding.

  7. Duncan Gafney 3rd June 2019 at 8:09 am

    As someone who works with NHS staff on this very issue, their situation is no more difficult or different from anyone else who is an active member of a defined benefit pension scheme and is a high earner.

    The only reason the spotlight is on the NHS is because of the number of high earners within it and also because the likes of consultants and surgeons are asked to do extra shifts which are effectively paid “overtime”, whereas very few other earners in this bracket get such things.

    There are several ways out of the problem, including scrapping tapering, allowing staff that cease acruing further membership of DB schemes to voluntarily break “salary links”.

    But fundamentally it shows how complex our pensions and income tax system is and why everyone should receive education about this at school, we might then end up with more financially literate people who understand the concept that the only money the government has, is that which is takes from the tax payer.

    I doubt this will happen though..

    • Julian Stevens 3rd June 2019 at 9:20 am

      How many highly paid NHS employees are likely to agree effectively to opt out from any further DBP accrual just so they can earn some overtime money (taxable at 40%) without being hit by the TAA? Most, I suggest, are far more likely just to turn down any requests to work overtime, which is exactly what’s happening already. Others are just retiring, in the wake of which the NHS is deprived of any further input from them at all, thereby exacerbating the problem.

      The only practical ways to tackle this issue with NHS high earners are either to raise (for everybody) the earnings threshold at which the TAA begins to bite or scrap it altogether. Selective exemption is not an (acceptable) option. It’s a nettle that the Chancellor needs to grasp but which he appears extremely reluctant to.

      • Oh I utterly agree that you have to have a level playing field for all and that any solution to the issues need to address the problem equally for everyone.

  8. John Hutton-Attenborough 3rd June 2019 at 10:09 am

    Restrict contributions to basic salary only. Then they can do as much overtime as they like without worrying. Seems straightforward to me!

    • Thank you for demonstrating exactly why this gets so complicated.

      All NHS pensions are calculated based on full time pensionable pay and overtime does not and never has counted towards that.

      The problem is caused by the tapering, so lets look at an example.

      Doctor B, is a consultant earning a base salary of £125,000 and is a member of the NHS pension scheme. Because his personal contribution rate to the scheme is 14.5%, his “threshold income” is £106,875, so his AA is not tapered, which provides B with some piece of mind as he knows that only if his pension growth is over £40k, will he suffer an AA tax charge.

      Doctor B’s hospital then asks him is he could do an extra shift every other week as they are desperately short staffed. They will pay him an extra £500 per shift he does.

      Now this will make no difference to the amount of pension he acrues, but what it will do is push up his threshold income.

      Doctor B signs up to do those extra shifts each year and does another 26 shifts which pay him £13,000 gross.

      Given where his income is, he will pay effectively 60% income tax on all this extra income, but his threshold income now becomes £119,875.

      Then the following year he gets notified that because he had a pay rise, his deemed contribution to the NHS pension was £91,500.

      So what is his net situation?

      Well if he didn’t take on the extra shifts, he would still potentially suffer an AA tax charge on the £51,500 in excess of the standard AA. However he may have some carry forward available. But lets assume he doesn’t. So he is £51,500 over and will pay a tax charge of at least £20,600.

      However if he had done the extra shifts, his AA would have been fully tapered down to £10k, so his AA tax charge would have become at least £32,600, i.e £12,000 more, despite the fact that his increase in pension benefits did not change at all, he simply earned an extra £5,200 net after he had paid income tax.

      So earning £5,200 caused him an additional tax charge of £12,000 at least. Which means earning £13,000 gross, caused him to pay tax of £19,800, i.e a effective tax rate of 152%.

      So does it still look simple?

  9. The tapered annual allowance appears unfair to all and should be scrapped.

    The major problem for doctors and any other members of DB schemes is the way pension input amounts are calculated. My doctor clients would be better served if the amount they pay into the scheme plus the “notional” amount paid in by their employer were totalled, like in the DC schemes. Fairer and more transparent. The NHS scheme will soon not be a final salary scheme at all.

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