Government announces emergency short-term fix to NHS pensions crisis
It’s rare that issues surrounding pension schemes make the national news, but in 2019 the NHS pension crisis was never far from the headlines. Issues with the controversial Tapered Annual Allowance have seen many NHS employees turning down work and additional shifts for fear of facing large tax bills.
In November 2019 the Hospital Consultants and Specialists Association (HCSA) found more than a third (34%) of doctors have cut their hours, and 39% have turned down or given up medical leadership roles in the NHS because of their pension concerns. Around half of those who have taken either course of action said that no other doctor had stepped in to take over their work.
Now, in an emergency measure, the government has said that it will cover the tax bills that doctors and consultants are facing until a long-term solution can be found. Keep reading to find out more.
The problem with the Tapered Annual Allowance
We will shortly be sharing our guide to the NHS pension scheme, busting seven commonly held myths about the scheme.
While problems with some aspects of the scheme have hit the headlines, the NHS pension scheme still offers some excellent benefits.
However, for some higher earners, issues with the Tapered Annual Allowance have seen them face unexpected tax bills at the end of the year.
Introduced in 2016, the Tapered Annual Allowance reduces the allowance for those on high incomes and applies to people who have both:
- ‘Threshold’ income of over £110,000 a year (total taxable income net of the value of any employee pension contributions); and
- ‘Adjusted’ income of over £150,000 a year (total taxable income plus the real growth of pension rights over the year).
If both these points apply to you, your annual allowance is reduced by £1 for every £2 of adjusted income you receive above £150,000. This means that if you have an adjusted income over £210,000 your annual allowance will be tapered to just £10,000. You can then only claim tax relief on the first £10,000 of your pension contributions.
As additional NHS shifts can be unpredictable, and the NHS pension rules can be complex, it can be difficult to know whether you will be affected by the Tapered Annual Allowance in any given year.
Government announced emergency fix to try and head off crisis
In an attempt to encourage hospital staff to accept extra shifts through the winter, the government has announced emergency measures to tackle the crisis.
For the 2019/20 tax year, doctors and consultants in England will have their pension tax bills covered by the government. Tax bills incurred by senior physicians this year will be covered by the NHS pension scheme under the ‘scheme pays’ process until a permanent fix is found.
The ‘scheme pays’ system allows individuals to settle annual allowance tax charges of more than £2,000 through the pension fund without needing to find funds upfront.
Essentially, the pension scheme pays the tax charge, and an individual’s benefits are adjusted at retirement. Interest is also paid. However, as a one-off measure, the government has also said that they will refund any reduced pension that would be due at retirement.
This move has proved controversial. As the NHS pension scheme does not hold any funds due to its unfunded structure, the extra money required to mitigate doctors’ increased tax liabilities would need to come out of the general NHS budget. This, in turn, implies that funds will have to be reallocated from frontline clinical services.
In November 2019, former Pensions Minister and Royal London policy director Steve Webb criticised the proposals. He said: “The plan for the NHS to pay the tax bills of doctors amounts to a bizarre money-go-round with one part of the public sector paying money to another in order to resolve a short-term crisis.
“The fundamental problem here is the complex system of pension tax relief.
“The failure of the government to address this issue has resulted in emergency measures having to be taken…simply to avoid a winter crisis in the NHS. The Treasury could have avoided all of these problems if it had simply admitted months ago that the pension tax relief system is too complex and had abolished the tapered annual allowance altogether”.
Permanent solution still to be found
While the emergency measures should help to alleviate this problem in the short term, experts are calling on the government to come up with a long-term fix.
The Secretary of State for Health and Social Care, Matt Hancock, repeated his pledge to review the Tapered Annual Allowance during a speech at a think tank Policy Exchange on 18 December. He said the government would “fix the pensions system so senior doctors and nurses can take on extra shifts without the fear of an unexpected tax bill”.
Professor Andrew Goddard, president of the Royal College of Physicians, agreed that fundamental reform was needed as soon as possible. “The new government must sort out a long-term fix for the pensions issue,” he said.
“The temporary solution was welcome but, given the impact of the pensions tax on individual consultants and on the NHS, this is a matter of urgency.”
Carrie MacEwen, chair of the Academy of Medical Royal Colleges, agrees. She said: “The government’s failure to act quickly on this pressing issue has had a direct impact on the care patients receive. We know many of the most senior doctors simply left the service or dramatically cut their hours to avoid the punitive tax rules.
“We have welcomed the interim measure agreed last month by NHS England and will work with the government to find a long-term solution. But this is a complex taxation issue and not just about the NHS. So whatever solution is found, it’s unlikely to be simple.”
Get in touch
Have you been affected by the Tapered Annual Allowance? Or do you have questions about the NHS pension scheme and whether joining or leaving is the right choice for you? If so, please get in touch. We specialise in advising doctors, dentists, locums and other medical professionals, so please email info@medicalandgeneral.co.uk or call (01404) 515544 to find out more.
