RSM UK's Jackie Hall explains why some doctors are refusing to take on more work because of the effect on their NHS pensions.
Back in 2015 when the then Chancellor of the Exchequer George Osborne announced cuts to tax relief for higher earners, no one realised the unintended consequences for our beleaguered NHS some four years later.
The changes, introduced in April 2016, meant that anyone with income over £150,000 per annum would have their annual pension contribution allowance, normally £40,000, reduced at a rate of 50p for every £1. In consequence, those with income of £210,000 or more would have a maximum annual allowance of just £10,000.
Pensions savings above this amount suffer an annual allowance charge at up to 45% at current rates. Although the individual is liable to pay the tax if the charge is greater than £2,000 the individual can opt for the pension scheme to pay the tax.
The restrictions apply to all high-earners so why are they causing so much difficulty in the NHS?
When the new rules took effect, many private-sector employers introduced a cap on pension contributions to ensure that members did not incur the extra tax charges. Unfortunately the NHS pension scheme did not amend its rules to reflect this. As a result many higher-earning doctors and consultants are suffering the additional tax charges.
It is understood that consultants are refusing to take on extra work, fearing that the additional income will lead to them exceeding their tapered annual allowance resulting in a tax charge. This in turn is increasing staff shortages and lengthening patient waiting lists
So what, if anything, can be done about this?
The NHS pension scheme allows members to opt in and out when they choose and there is a general belief that higher-earners should do just do that in order to avoid the tax charges. However, a consultant’s income can be very unpredictable and it isn’t always possible to accurately predict income in the year, which leads to the unexpected tax charges.
While the NHS and the British Medical Association may lobby for special treatment for the NHS scheme this is unlikely to provide a satisfactory solution for all. Some NHS trusts have therefore started offering cash payments in lieu of the employer pension contributions in order to mitigate the annual allowance charges. This in turn leads to additional costs for both the NHS and for the consultants, with those cash payments being subject to tax and employee’s National Insurance contributions (NIC) at up to 47% and employer’s NIC of 13.8%.
With pensions advisors estimating that a pension pot of £1,055,000, equal to the lifetime allowance, will produce a pension income of only £25,000 is there an argument for yet another reform of the pension rules which will benefit all and which will go some way to mitigating the current staff shortages in the NHS?