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You don’t need me to reiterate how devastating the effects of the current pension taxation system has been for doctors, our patients and the NHS.
You will no doubt have experienced this personally either in the form of receiving a large unexpected tax bill, or seen your service facing lengthening waiting lists, unfilled rota gaps and increased vacancies as colleagues take early retirement.
You may have seen the suggestion of raising the threshold income to £150,000 reported in the mainstream press. This is not something that has been suggested directly to us by Government who have been clear that they are still considering various options.
However, we have made it very clear that while this proposal may prevent some doctors being affected by the taper, this proposal is absolutely not the best solution for doctors or the NHS.
As we have consistently told Government, the annual allowance itself is fundamentally unsuited to defined benefit pension schemes. In defined benefit schemes, calculated pension growth is intrinsically linked to the amount of pensionable pay and, as such, it is not possible to control how much is paid into a pension each year.
If the solution is only to raise the level of the threshold income, all of the perverse scenarios that can occur because of the annual allowance remain. Doctors can exceed the standard annual allowance and therefore incur tax liabilities by taking on management roles, receiving excellence awards or simply following a modest increase in their pensionable pay. To compound things if this pay rise is temporary, large amounts of tax can be paid on pension ‘growth’ that may not be received if pensionable pay falls before retirement.
It is an issue that applies across the public sector. For example, those in the armed forces often have rapid promotions with resultant increases in their pensionable pay which can trigger significant annual allowance tax bills. Given the nature of the work, opting out of the pension scheme and losing death in service and ill health retirement benefits are clearly not an option. This is having a significant impact in deterring people from seeking promotion to vital roles.
We are also aware of cases of doctors taking ill health retirement and as a result of receiving enhanced ill health retirement benefits, have been severely penalised by receiving large tax bills as this growth in pension has been deemed to have occurred in a single tax year. As these are all issues of breaching the standard annual allowance, many of those affected will have incomes far below £150,000 and simply raising the level of threshold does nothing to remove the unfairness of this tax.
This proposal also does nothing to help those doctors whose earnings are over £150,000 who will still feel the full force of tapering. There has been no mention of an increase in the level of the adjusted income and unless this is also increased, not only does a tax cliff remain, but it becomes even more precipitous.
Indeed, in a scenario where the threshold and adjusted income levels are the same, exceeding the threshold of £150,000 brings with it the certainty of large additional tax liabilities as annual allowance plummets. These doctors will still have to pay the same amount of tax as they would have if the threshold income remained at £110,000.
They will in effect still be paying to work.
It has been suggested that this could be mitigated by flexibilities. Unfortunately, this is not really the case. Unless accompanied by the full mandated recycling of employers’ contributions, ‘flexibility’ is in reality a significant pay cut. Many employers in secondary care are still refusing to adopt recycling policies and of those that are, many are only offering to recycle employers’ contributions at a reduced rate. Even if full recycling was available it remains problematic.
Pension flexibilities will be extremely complicated to use in the NHS and if these contributions are recycled this would lead to an increase in taxable pay. This further increases the likelihood of exceeding the threshold income or creating a vicious circle in which you then need to further reduce the proportion of pay that is pensionable. This could then increase your taxable pay and once again affect how much pay can remain pensionable.
The only viable solution for these doctors is likely to be to continue to reduce the work they do to keep their income below the threshold. Given the penalties for exceeding this higher threshold will be so harsh, it is likely that doctors will ensure they leave sufficient ‘margin for error’ and seek to keep income below this level. Consequently, the number of doctors reducing sessions will be significantly higher than the Government predicts.
Can the Government be persuaded to adopt our proposal of scrapping the annual allowance in defined benefit schemes?
If we had been suggesting something that was significantly more expensive, we could understand why HM Treasury might at least wish to explore a cheaper option. However, we have made it clear to Government why the annual allowance is not an effective tax from a fiscal point of view. Changes in behaviour are not only going to reduce the amount of revenue generated from this tax but may in fact lead to overall tax receipts falling.
As doctors reduce sessions to keep pension input amounts within their available allowance, the amount of annual allowance tax payable is not only reduced, but the reduction in income tax and national insurance contributions from doctors alone are likely to exceed the total amount of annual allowance tax received in 2017/8, the latest figures available. This is before you consider both the financial cost of having to re-provision lost capacity in the NHS and the patient cost as a result of lengthening waiting lists.
We believe raising the threshold income for all workers is a more expensive option than scrapping the annual allowance in defined benefit schemes. There are five times as many
private sector workers than there are public sector and average private sector pay is higher.
As a consequence, if the level of threshold income is raised to £150,000, there will be many more people in the private sector than there are in the NHS who will benefit. The taper was primarily introduced to limit tax relief for high earners in the private sector but due to unintended consequences it has brought the NHS to its knees.
The irony is that this proposal not only fails to fix the underlying problem but provides the greatest benefit to the very people that the taper was meant to be applied to in the first place.
Vishal Sharma is BMA pensions committee chair and consultants committee deputy chair
Any solution needs to address the harm already done , with repayment of unfair taxed already charged since 2016