The government has decided to not go ahead with its proposed flexibilities for the NHS Pension Scheme as it believes changes to the taper threshold went far enough to address the issue.
Responding to feedback on the department of Health and Social Care's consultation on introducing flexibility to the NHS Pension Scheme, the government concluded it would not push ahead with any of the original proposals but would instead launch a tool to help doctors understand the tax implications of their pension.
The government’s original proposals would have allowed defined benefit scheme members to choose a personalised pension growth level at the start of each tax year.
Members would have then been given the option to top up their pension pots when they were clearer on their total earnings for tax purposes, or phase in increases in pensionable pay.
These measures, proposed in September, were a step further from the 50:50 split the government had initially proposed in July.
This would have seen clinicians "halve their pension contributions in exchange for halving the rate of pension growth".
The majority of consultation responses argued that reforming or scrapping the tapered annual allowance would be the simplest way of solving the issue of senior clinicians limiting their NHS work for fear of large unexpected pension tax bills.
The British Medical Association stated the taper was “beyond the comprehension of the most experienced accountants and tax advisors”.
This view was supported by a large number of respondents who argued that it should not be so difficult to make an accurate estimate of pension tax liability, which they said at present was “challenging without taking formal financial advice”.
But the government argued its move to raise the income threshold for tapering from £110,000 to £200,000, as announced at the March 2020 Budget, had addressed the taper issue.
The government stated: “This restored the incentive for senior clinicians to take on additional NHS work.
“Increasing the taper thresholds therefore achieves the same intended policy aim as the proposed flexibilities but without the additional complexity that the latter would introduce.
“Accordingly, the department will not proceed with implementing those proposals.”
Although it has ruled out any tax reform, in order to help NHS workers work out any potential annual allowance tax charge, the government has commissioned NHS Employers to provide a 'ready-reckoner' tool.
This will allow members to input their pay and pension details to get a view on whether working overtime may lead to an annual allowance tax charge.
It also provides an estimated breakdown of the total annual cost of scheme membership and shows how much a member's NHS pension is projected to increase by.
The tool, which was available from autumn 2020, has incorporated a traffic light system to alert a member as to whether they are close to breaching the taper allowance.
Both the annual allowance and tapered annual allowance have created a raft of issues for senior NHS staff over the past couple of years.
The taper gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.
The rules have forced senior clinicians and other high earning public sector workers to either leave their pension scheme, cut down on their working hours or retire early to avoid punitive tax bills.
While the Budget lifted the ‘adjusted income’ and ‘threshold income’ levels, there are still doctors affected by the charge, including those who are taking on extra shifts due to the pandemic.
Although the government argued only a “limited number” of the very highest earners, with incomes of more than £200,000, will be affected by the taper going forward.
amy.austin@ft.com
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