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RSM UK's George Bull points out that the government has known for years about the looming pension tax problems for doctors and others in the public sector - and proposes a radical solution.

The row over doctors’ pension contributions and tax bills has taken a fresh turn recently. On the face of it, things began well, with Prime Minister Boris Johnson’s initial recognition that ‘it is clear that something has gone badly wrong in the taxation of doctors’ pensions. So, this government is listening. We are fixing it. We are changing the rules so that doctors no longer face a perverse incentive to reduce hours.’

These rule changes took the form of a Department of Health offer giving doctors the choice to halve their pension contributions, and their pensions too. As an outsider in the debate, it’s difficult to comprehend that the government ever thought that this offer would be acceptable, especially without the employers’ full pension contributions being recycled back into doctors’ salaries.

Following the British Medical Association’s formal rejection of the offer, the new Health Secretary Matt Hancock addressed the issue. In a BBC Radio 4 interview on Monday 5 August 2019, he repeated that the Prime Minister will resolve the ‘unintended consequences’ of the taper for hospital doctors and surgeons. This is precise statement of exactly what the problem is not. 

The tax bills afflicting doctors and surgeons are a result of the tax system working exactly as intended by Parliament, which enacted the legislation despite warnings of its potential adverse impact not only for top NHS personnel but also for the most senior police, judges and other public servants. This House of Commons document shows that, as long ago as 2012, (see notes on page 25), the government had been put on notice that public sector employees, including doctors, would be adversely affected by a complex range of pensions tax changes which were then being debated. 

That’s four years before the tapered annual allowance, which is the root cause of the current NHS pensions problem, came into force on 6 April 2016 for high earners. By way of a quick recap, for every £2 of income above £150,000 per annum, £1 of annual allowance will be lost. The maximum reduction will be £30,000 meaning that anyone earning over £210,000 will have their annual allowance capped at £10,000. Pension contributions in excess of the reduced annual allowance will be taxed at up to 45 per cent.

In the private sector, highly paid individuals may renegotiate their terms so that pension contributions are paid to them as increased salary. That’s not possible for NHS employees as rules currently stand so it’s disappointing to see the Treasury and HMRC stepping aside from what has been described as the NHS pensions allowance problem, leaving the NHS to resolve a tax-driven issue which is translating into rapidly-growing hospital waiting lists. 

This is a Treasury problem and should be resolved by the Treasury through HMRC. There is a compelling argument that – as the value of pensions tax reliefs is already curtailed by the lifetime limit – the only impact of the annual allowance taper is to reduce the rate at which the individual reaches the lifetime limit.

Wouldn’t it be simpler if the annual allowance taper were abolished for everybody? This would cost the Treasury little or nothing in the long term, it would reduce the complexity of the tax system and it would remove this latest contributor to hospital waiting lists. Most importantly, as we have said before, it would leave the NHS free to do what it does best: making people better.