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This note looks at the concerns about the impact of pension tax rules on some senior NHS clinicians and GPs who are members of the NHS Pension Scheme, a defined benefit (DB) public service pension scheme.

The annual allowance and lifetime allowance

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. The amount of tax-relieved pension saving an individual can build up is limited by the annual allowance (AA) and lifetime allowance (LTA). Both have been reduced in stages since 2010:

  • The standard LTA reduced in stages from £1.8 million in 2010 to £1 million in April 2016. It then rose in line with inflation from April 2018 until April 2021. The Government legislated in the Finance Act 2021 (s28) to freeze it at its current level of £1,073,100 until April 2026.
  • The standard AA reduced in stages from £255,000 in 2010 to £40,000 in April 2014. From April 2016, There is also a tapered AA, introduced in April 2016, which reduces the AA of higher earners (‘adjusted incomes’ above £240,000) to a lower level (a minimum of £4,000).

When making these reductions, the Coalition Government put in place measures to mitigate the impact. For example, people at risk of breaching the AA in a particular year can ‘carry forward’ unused allowances from the previous three years (FA 04, s228A) and in certain circumstances, people could apply for protection against a reduced LTA (FA 04, s218, Sch 36).

For more detail, see Pension tax relief: the annual and lifetime allowances, Commons Library Briefing Paper CBP 5901, March 2021.

Changes the tapered AA in 2020

The tapered AA, introduced in April 2016, reduces the AA of earners with adjusted incomes above a threshold level to a lower minimum than the standard AA. When these rules were introduced, they applied to people with ‘adjusted incomes’ (taxable income plus the value of pension growth) above £150,000 and ‘threshold income’ above £110,000. The taper could reduce the AA to a minimum of £10,000 (HMRC, Pension scheme rates, April 2021).

Although these rules applied across all schemes, the nature of many doctors’ work (for example, consultants taking on additional work often at short notice to cover service pressures) meant there was a particular impact on the NHS. This was particularly felt in 2019-20 when the capacity to bring forward unused AAs from the previous three years was largely exhausted (DHSC consultation, July 2019).

In the March 2020 Budget, the Government announced increases of £90,000 in the income thresholds for the tapered AA (‘adjusted income’ increased to £240,000, ‘threshold income’ to £200,000) and a decrease in the minimum AA to £4,000 (para 2.183-5; HMRC policy paper, March 2020). The BMA welcomed the announcement – which would mean that the “vast majority of doctors are now removed from the effect of the taper” – but said it was long overdue and that further reform was needed. The changes were legislated for in the Finance Act 2020 (s22).

NHS pension scheme flexibility

Before deciding to change the tapered AA thresholds, the Government considered – but ultimately did not take forward – proposals for more flexibility in pension scheme rules.

The Department of Health and Social Care (DHSC) consulted in September 2019 on proposals to allow senior medical staff to opt to build up pension benefits at a lower rate to reduce the risk of incurring a tax charge. The BMA described the proposals as a ‘sticking plaster’ and the pension tax rules needed to change.

In Budget 2020, the Government said the flexibility proposals would not be taken forward (para 2.184). This was confirmed in February 2021, when the DHSC responded to the consultation.  It said the majority of respondents had “argued that tax reform would be the simplest way of solving the issue of senior clinicians limiting their NHS work for fear of large unexpected annual allowance charges.” Changes to the tapered annual allowance in FA 2020 had achieved “the same intended policy aim as the proposed flexibilities but without the additional complexity that the latter would introduce.”

In its 2021 report, the Review Body on Doctors’ and Dentists’ Remuneration, recommended that employers consider making better advice available and allowing “flexibility for employees to take some of their remuneration as non-pensionable pay, thus reducing their tax liabilities without having to leave their pension scheme” (para 4.86).

Calls for further reform of pension tax rules

In its October 2019 report on Taxation and Life Events, the Office of Tax Simplification said the Lifetime and Annual Allowance charges could present significant complexities for pension savers in different circumstances in either DB or DC schemes. It said that, given the aim of limiting the overall pension tax relief going to any individual, applying both charges might be unnecessary. For DB schemes, – like the NHS Pension Scheme – one option might be to apply the LTA only (para 3.74-5). 

In March 2020, the BMA welcomed the changes to the tapered AA, but said that a pay increase or a promotion could still result in doctors facing significant tax bills as a result of exceeding the standard AA. Responding to the decision in Budget 2021 to freeze the LTA at its current level until April 2026, it said this was “going to push doctors out of the NHS.” It argued for the option of a tax-unregistered pension scheme for those affected, pointing to planned reforms for the judiciary.

In a Parliamentary Written Answer on 18 May 2021, the Government rejected this approach on grounds that the circumstances of judicial appointments are unique:

The unique circumstances of judiciary appointments mean that it is necessary to reform their pension arrangements. Judges are not able to work in private practice after taking up office, and many judges take a significant pay cut to join the judiciary. The combination of these factors is why the Government is committed to introduce a reformed judicial pension scheme. Such a scheme would not benefit the vast majority of NHS staff, as members would receive no tax relief on their contributions.

The BMA continues to call for reform to help address doctor shortages, including “removing punitive pension taxation rules so older doctors can remain in work flexibly.”

For more on the reforms to Judges’ pensions schemes, see Commons Library Briefing, CBP 8540, April 2021.


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