Public service pensions: Impact of pension tax rules on NHS consultants and GPs

Pension tax rules apply to all pension schemes the same, but some have had a particular impact on the higher-earning members of the NHS pension scheme in recent years, including consultants and GPs facing tax charges for breaching allowances.

There have been changes to reduce this impact, including changes made to pension tax allowances in the 2023 Spring Budget.

UK pension tax relief

In the UK, 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.

There are limits on the amount of tax relief someone can receive when contributing to their pension. These include an annual allowance, which limits the amount someone can pay into a pension each year before they pay tax, and a lifetime allowance, which is the total amount someone can usually build up in pension pots without paying a tax charge.

Further information is available in the Commons Library briefing Pension tax relief: The annual allowance and lifetime allowance.

The NHS pension scheme

The NHS pension scheme is a public service occupational pension scheme. It is a defined benefit scheme which means that it pays a promised pension based on salary and length of service.

Further details about the scheme are covered in the Library briefing on the NHS Pension Scheme.

How pension taxation allowances affect members of the NHS pension scheme

Although pension tax rules are applied across all pension schemes, the higher salaries and the nature of many doctors’ work (for example, consultants taking on additional work to cover service pressures) meant that limits to pensions tax relief has had a bigger impact on the NHS compared to other schemes.

The annual allowance

The annual allowance was reduced from £255,000 in 2010 to £40,000 by April 2014. Since 2016, a person’s annual allowance is tapered (reduced) if their taxable income (threshold income) and total income including pension contributions (adjusted income) are above set amounts. When these rules were introduced in 2015, they applied to people with adjusted incomes above £150,000 and threshold incomes above £110,000.

When making these reductions, the Coalition Government put in place measures to mitigate their impact on people who face a tax charge for breaching the allowances. For example, people at risk of breaching the annual allowance in a particular year can ‘carry forward’ unused allowances up to a limit from the previous three years .

The NHS was particularly affected in 2019/20 when many members had exhausted their limit to bring forward allowances. To address this, in the March 2020 Budget, the Government announced an increase of £90,000 in the income thresholds for the tapered annual allowance (adjusted income increased to £240,000, threshold income to £200,000).

In the 2023 Spring Budget the Chancellor announced further changes, including the annual allowance increasing from £40,000 to £60,000 and the adjusted income for the tapered annual allowance to £260,000.

The lifetime allowance

In the March 2021 Budget, the Government said the lifetime allowance would be frozen at its current level of £1,073,100 until April 2026. The British Medical Association (BMA) said this was “going to push doctors out of the NHS” (PDF).

In the 2023 Spring Budget it was announced that there would be no tax charge for exceeding the lifetime allowance in 2023/24 and it would be abolished in a future Finance Bill.

High inflation

The annual allowance calculation for the increase in value of a defined benefit scheme includes an adjustment for inflation as measured by the Consumer Prices Index (CPI). The NHS pension scheme also adjusts pension benefits it provides to account for inflation.

There was a potential issue in the 2022/23 tax year because both calculations used different time periods. Inflation in September 2022, the measure used by the NHS scheme, was significantly higher than inflation in September 2021, the measure used in the annual allowance calculation. This meant that inflationary increases to someone’s pension benefits above the 2021 level of inflation would have counted towards their annual allowance.

On 7 March 2023, the Government announced that it would delay the increase to NHS pensions by five days, from 1 April 2023 (the 2022/23 tax year) to the 6 April 2023 (the 2023/24 tax year). This removed the disconnect between the two calculations as September 2022 inflation would be applied to both the annual allowance calculation and the NHS pension scheme in the same tax year (2023/24).