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The NHS pension scheme

The NHS pension scheme is 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 Commons Library briefing NHS Pension Scheme.

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 and lifetime allowance. Both have been reduced in stages since 2010:

  • The standard lifetime allowance reduced from £1.8 million in 2010 to £1 million by April 2016. It increased line with inflation between April 2018 and April 2021, before being frozen at its current level of £1,073,100 until April 2026.
  • The annual allowance was reduced from £255,000 in 2010 to £40,000 by April 2014. Since April 2016, the annual allowance has been tapered, reducing for higher earners.

When making these reductions, the Coalition Government put in place measures to mitigate the impact. For example, people at risk of breaching the annual allowance in a particular year can ‘carry forward’ unused allowances from the previous three years and in certain circumstances, people can apply for protection against a reduced lifetime allowance.

Changes the annual in 2020

Since 2016 a person’s annual allowance is tapered (reduced) if their threshold income (taxed) and adjusted income (total including pension contributions) are above set amounts. When these rules were introduced they applied to people with ‘adjusted incomes’ above £150,000 and ‘threshold income’ above £110,000. The taper could reduce the annual allowance to a minimum of £10,000.

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 annual allowances from the previous three years was largely exhausted.

In the March 2020 Budget, the Government announced increases of £90,000 in the income thresholds for the tapered annual allowance (‘adjusted income’ increased to £240,000, ‘threshold income’ to £200,000) and a decrease in the minimum annual allowance to £4,000. The British Medical Association (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.

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. It said that, given the aim of limiting the overall pension tax relief going to any individual, applying both the annual and lifetime allowance might be unnecessary. For defined benefit schemes, like the NHS Pension Scheme, one option might be to apply the lifetime allowance only. 

In March 2020, the BMA welcomed the changes to the tapered annual allowance, 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 £40,000 annual allowance. Responding to the decision in Budget 2021 to freeze the lifetime allowance until April 2026, it said this was “going to push doctors out of the NHS.” The BMA 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.

For more on the reforms to judges pensions are covered in the Commons Library briefing, Judges’ pensions schemes.

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