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This note looks at the concerns about the impact of the ‘tapered annual allowance’ on some senior NHS clinicians and GPs.

Pension tax rules

The annual allowance (AA) limits the amount of annual pension savings that benefit from tax relief. The standard AA is now £40,000, down from £255,000 in 2010. To mitigate the impact of reductions in the AA, the Coalition Government legislated to allow people to carry forward unused allowances from the previous three years. There is also a tapered AA, introduced in April 2016, which operates to reduce the annual allowance of higher earners down to a minimum of £10,000.

These rules apply across pension schemes in the public and private sectors. However, the nature of work – with consultants taking on additional work, often at short notice, to cover service pressures – means there has been an impact across the NHS. The tapered AA had a bigger impact in 2019/20 than in previous years because – four years on from its introduction – the capacity to carry forward unused allowances from previous three years was greatly reduced (DHSC consultation, July 2019).

In August 2019, the Government said it would “review how the tapered annual allowance supports the delivery of public services, such as the NHS.”

Budget 2020

In the Budget on 11 March 2020, the Government announced increases in the income limits used in calculating a tapered annual allowance and a decrease in the minimum tapered annual allowance (para 2.183-5; HMRC policy paper, March 2011). Provision for this is in clause 21 of the  Finance Bill 2019-21,

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. It also continued to argue that the annual allowance was unsuited to defined benefit pension schemes such as the NHS, where a pay increase or promotion could result in doctors with incomes far below the new thresholds facing tax bills as a result of exceeding the standard annual allowance.

Removing the AA from defined benefit schemes has also been proposed by the Office of Tax Simplification (Taxation and Life Events, October 2019, para 3.74-5).  

Plans for NHS pension scheme flexibility

The DHSC consulted in 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 2011, the Government said they would not be taken forward (para 2.184).

In December 2019, Health Secretary, Matt Hancock, agreed for reasons of “urgent operational necessity” to allow NHS England to compensate senior clinicians incurring a pension tax charge in 2019/20. Guidance is on the NHS England website.

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