Pension tax relief restrictions – will the doctor be able to see you after 11 March? - PKF Francis Clark
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Pension tax relief restrictions – will the doctor be able to see you after 11 March?

During the lead up to the December general election, the Conservative party were desperate to ensure that their campaign wasn’t high-jacked by bad headlines coming out of the NHS about hospitals being unable to cope due to winter pressures. This was always going to be one of the risks of holding the election during the winter.

Right in the middle of the campaign, there was an intervention by Matt Hancock, which The Times announced with the headline “NHS will pay tax bills to keep consultants working overtime”. Normally the lead-up to an election is a time of purdah for any immediate changes, so this announcement took everyone by surprise.

The background to the intervention is the limits that are put on the tax relief available to individuals making pension contributions. The limits are known as the annual and lifetime allowances. As is apparent from the names, the annual allowance restricts the tax relief that can be claimed in any one year, and the lifetime allowance restricts the amount of pension funds that are allowed to grow tax-free over the course of a lifetime.

These allowances have been drastically cut back in recent years. The lifetime allowance peaked at £1.8m in 2012 but was reduced to £1m by 2016, although since 2018 it is now being increased by inflation each year.

The reduction in annual allowance was even more marked, falling from £255k in 2010/11 to just £40k from 2014/15. Furthermore from 2016/17 for individuals with income exceeding £110k, the allowance is tapered down from £40k to a minimum of £10k.

The effect of the taper produces very high marginal rates of income tax and GPs and consultants were typically in the earning bracket affected by this. Back in 2015 when the taper rules were first announced I calculated the take-home pay after tax and pension contributions for a typical GP, and found that for income between £130k and £180k the additional take-home pay for the extra £50k of earnings was just £3k (so an effective tax and pension contribution rate of 94%).

Members of defined benefit schemes like the NHS Pension Scheme, have been able to mitigate the effects of this by making an election for ‘scheme pays’ which passes the responsibility for paying the annual allowance tax charge on to the pension scheme. However the quid pro quo for this is to see pension benefits reduced on retirement. As a client said to me instead of being called ‘scheme pays’ it should be called ‘doctor pays – but just not yet’.

The intervention by Matt Hancock was a one-off for 2019/20, and provides a contractual agreement that if an NHS clinician makes a scheme pays election, then on retirement their employer will make a compensatory payment equal to the pension reduction suffered as a result of the scheme pays election. The hope was that this would be enough to persuade clinicians to work extra hours over the winter to keep the NHS functioning.

This, to continue the medical analogy, is very much a sticking plaster on a gaping wound, and doesn’t alter the underlying tax legislation which is the cause of the problem. It is also difficult to see why a particular concession can be brought in for clinicians, but not other higher earning public sector workers who are equally affected.

What changes then might the Chancellor be persuaded to introduce?

Top of my wish list is the suggestion from the Office for Tax Simplification that only the lifetime allowance should be applied for members of defined benefit schemes, and only the annual allowance should be applied to members of defined contribution schemes. This is simple, fair and effective.

Other options include:

  • Scrap the tapering rules, so the annual allowance is £40k regardless of income levels
  • Increase the starting income level for the taper from £110k
  • Increase the annual allowance from £40k. As there is no allowance for inflation, fiscal drag brings more taxpayers into the net each year. If inflation had been applied since the annual allowance was first reduced to £40k, by April 2020 it would be £46k

Whilst changes to the legislation will on the face of it reduce the tax take, many clinicians have already made decisions to cut their working hours as a result of these pension charges, so action to reverse this trend will increase ‘normal’ income tax receipts for the Government.

For anyone interested in more opinions just search on Twitter for #scrapthetaper.

This is the latest article in our series of pre-Budget commentary on what we expect to see on 11 March. Alongside our usual budget day commentary, we will shortly be announcing details of a number of budget events (being held on 12 March across the region). For more information, please keep and eye on our events page or contact [email protected].

FEATURING: Luke Bennett
Luke is a partner specialising in advising the healthcare sector, acting for partnerships of GPs and freelance locums, consultants, dentists, vets and a range of… read more
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