In the latest announcement in the new UK government’s policy blitz, Sajid Javid, the chancellor, on Wednesday pledged to review the pensions taper that has led thousands of senior doctors and other clinicians to reduce their hours or retire for fear of facing punitive tax charges.
By expanding this to include highly paid staff elsewhere in the public sector, Mr Javid has acknowledged that reforms introduced in 2016 to reduce the level of tax relief claimed by high earners are causing strains well beyond the overstretched NHS.
But key questions remain about the cost of the proposals and their impact on other vital public servants such as judges and senior police officers.
What is the tapered annual allowance?
The government sets limits on what can be saved into, or grow, in a pension before tax charges apply. Most people can put up to £40,000 a year into a pension before they will be hit by tax charges. However, in 2016, measures were introduced to clamp down on the pensions tax breaks claimed by the very highest earners.
The so-called “taper” sees the annual allowance shrink from £40,000 to as low as £10,000 a year for those with “adjusted” incomes of £150,000-£210,000. Adjusted income includes taxable earnings from not just salary but other sources such as rental income and dividends. Pension contributions are also counted.
Under the taper for every £2 of adjusted income over £150,000, the annual allowance is reduced by £1 to a floor of £10,000. However, complex rules around how it works can see those with earnings of £110,000 a year or more caught by the measure.
Who is affected by the taper?
A total of about 300,000 pension savers are estimated by the government to earn enough to be affected by the pension taper. When the policy was introduced, many private-sector employers capped pension contributions for staff at £10,000 a year, and paid salary top-ups in lieu, so staff were not disadvantaged.
However, high earning public sector staff are at risk of getting hit because they are enrolled in “defined benefit” style pension schemes where the impact of the policy is much harder to predict. Rigid pension contribution levels also make it difficult to mitigate the taper.
Since it was introduced, dentists, police and judges and firefighters and senior armed forces personnel have been affected by the taper and in some cases have been turning down promotions or extra shifts, which may trigger tax charges.
The government has pledged to review the impact of the taper for the public sector with any announcement expected at the Budget. However, industry experts say there needs to be a much broader review of retirement savings incentives.
How much is the taper worth to the exchequer?
The measure is expected to raise £1.2bn this financial year, rising to £1.3bn next year. Economists point out that this is a relatively small sum in the context of government finances, and say that the taper makes little sense given its complexity and the disincentives it creates.
“It’s hard to see much logic to the tapering of the annual allowance,” said Stuart Adam, senior research economist at the Institute for Fiscal Studies. “It is not clear why someone getting total remuneration of £150,000 should be able to save £40,000 of it in a pension without incurring penal tax rates, while someone earning £210,000 should only be able to save £10,000.”
Why has the taper been such a problem for NHS doctors?
Like other public sector employees, NHS staff have few options to mitigate the impact of the taper and their pension contributions are set at rigid levels, typically 13-14 per cent of salary for a senior consultant.
Also senior clinicians working overtime to help clear patient backlogs have been triggering five-figure pension tax bills that can wipe out their income from extra shifts. Avoiding the extra charges by cutting back on their hours has created even deeper problems for a service already facing a workforce crisis.
Will the government’s changes end NHS staff shortages?
They could. The Treasury has pledged to review how the taper affects the operation of public services beyond the NHS, but while this review is under way, it is proposing to give senior doctors full flexibility over how much they save into their pension pot which should stop them falling foul of the taper if they work longer hours.
These changes are not due to start until the next financial year in April, but health trusts have been told they can take voluntary steps to address clinicians’ concerns until then. The Department of Health has promised to issue guidance on this flexibility and said that affected staff would be able to opt out of the pension scheme mid-year so they would not be hit by the tax charges.
NHS employers would be able to use options such as putting pension contributions into salaries and providing incentive payments for additional shift work.
However, other public sector bodies are demanding to be able to do the same. “The new pension flexibility for NHS doctors is a major win,” said Lucille Thirlby, assistant general secretary of the FDA, the union for senior public service professionals. “But they are not the only ones suffering the negative effects of punitive pension taxation. NHS managers will not benefit from this change.”