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Rumoured new fix for doctor pensions crisis could mean windfall for ALL higher earners


The Treasury is reportedly pondering a tweak to pension tax perks that would offer a windfall to all higher earners in order to combat a staffing crisis in the NHS.

A one-year fix for the so-called ‘taper problem’, which sees doctors turn down shifts for fear of shock pension tax bills, was announced shortly before the election, but the Government is still seeking a more permanent solution.

It is considering raising a key threshold where the controversial ‘taper’ kicks in from £110,000 to £150,000, according to a report in The Times. 

The idea was dismissed as ineffective or ‘a sticking plaster’ by doctors and some pension experts – although one thinks it could work, and explains why below. 

NHS crisis: Critics say the pension tax issue affecting doctors is threatening patient care by causing longer waiting lists and delays to operations

NHS crisis: Critics say the pension tax issue affecting doctors is threatening patient care by causing longer waiting lists and delays to operations

The Treasury believes increasing the level at which pension contributions start counting as earnings would solve the problem for 90 per cent of doctors because consultants’ median (meaning midpoint) earnings are £112,000, says the news report by Chris Smyth.

The change would benefit all higher earners in the public and private sectors, and increase the Government’s pension tax relief bill, it adds.

That runs counter to expectations that the comfortably elected new government might want to radically overhaul pension tax relief to slash the cost, and free up money for other priorities. 

Cutting the amount of tax relief paid into everyone’s pots would be hard to square with a fix benefiting higher earners to solve an NHS staffing shortage.

At present, the NHS is footing pension tax bills run up by doctors for one year to address the crisis, which critics say is threatening patient care by causing longer waiting lists and delays to operations.

What is the taper?

The problem revolves around a controversial reform to the annual allowance, which is the amount most people can put in a pension and get tax relief – including their own and their employer’s contributions, and tax relief from the Government – and is currently £40,000.

‘The taper’ was introduced by former Chancellor George Osborne in the 2016/2017 tax year. 

It means the annual allowance is gradually reduced from £40,000 to £10,000 for those whose total income, including any growth in their ‘pension rights’ over the year, is between £150,000 and £210,000.

However, tax charges can kick in if your income is over £110,000 a year because of the way pension rights are calculated, and these are especially difficult for workers to keep track of in salary-related schemes like the NHS one.

High earning doctors who work unpredictable overtime shifts to reduce waiting lists find it hard to work out how close they are to the £110,000 threshold.

The ‘taper’, a pension tax rule explained in the box on the right, affects all higher earners such as headteachers and judges in the public sector, but also well-paid workers in the private sector,

But it has caused problems for doctors in particular due to working practices in the health service, with senior staff routinely expected to take overtime shifts, which now lay them open to massive and unpredictable tax bills.

Doctors and financial experts say the only way to resolve problems caused by the taper is to abolish it – although this would hand more pension cash to higher earners. 

In response to the news report, a Treasury spokesman said: ‘We don’t comment on speculation about tax changes.’

What is the reaction from pension experts and doctors?

Steve Webb, a former Pensions Minister who is now policy director at Royal London, tweeted: ‘If this is correct it would be classic Treasury – rather than simplify by scrapping a complex feature of the system, they simply tweak it and move on.’

His colleague Helen Morrissey, a pension specialist at the insurer, said: ‘While this news will be good for some in reality it is further evidence of HM Treasury choosing to tinker at the edges rather than tackle the source of the problem which is that the taper must be scrapped.

‘In short this is like using a sticking plaster in place of major surgery – we need reform of pension tax relief.’

Dr Vishal Sharma, British Medical Association pensions committee chair, said: ‘In its election manifesto, the Government pledged to ‘address the taper problem’, but this proposal would do no such thing.

‘It does not fix the fundamental problem of doctors being forced to limit the work they do to prevent being hit with significant charges on their pensions and many will still in effect be paying to go to work.’

He went on: ‘Due to the complexity of the way pension growth is calculated, with a final figure only known at the end of the tax year, even those who earn well below this increased threshold would still likely limit their work to ensure they’re not hit with unexpected charges.

‘We’ve had a year of inaction with flexibilities and consultations. 

‘Doctors and our patients desperately need an immediate solution that is simple and solves the problem completely; the NHS cannot cope with further half-measures.

‘The BMA firmly believes that scrapping the annual allowance and tapered annual allowance in defined benefit schemes – as suggested by the Government’s own advisers, the Office of Tax Simplification – is the only viable solution.’

Tom Selby, senior analyst at AJ Bell, said: ‘Raising the point at which the pension tax taper kicks in by £40,000 would help reduce or eliminate shock pension tax bills for a large number of high earners, including senior consultants in the NHS.

‘However, the problem with the taper isn’t just the point at which it takes hold – it is the fact that, because things like overtime make earnings levels far from certain, many people will have no idea if or to what extent they will be affected.’

‘When you combine that uncertainty with the mind-boggling complexity of calculating the taper, particularly in relation to defined benefit [final salary] schemes, it is far from clear that simply raising the point at which it takes effect will be enough to stop doctors refusing shifts.

‘We also don’t yet know whether this is viewed as the final solution to the NHS pensions crisis by the Treasury, or the beginning of a wider programme of pension tax reform.

‘The optics are certainly tricky as this move alone hands more tax relief to higher earners.’

But Gary Smith, chartered financial planner at wealth manager Tilney, welcomed the reported measure.

‘If my understanding of the mooted change is correct, they are proposing to increase the ‘threshold’ income level from the current £110,000 to £150,000 for all of the UK population, not just members of the NHS pension scheme or those working in the public sector.

‘When assessing if an individual will suffer a tapering of their annual allowance, there are currently two tests, these being:

-Adjusted income

-Threshold income

‘Under the proposal an individual will only suffer a tapering if their annual allowance is above £150,000 and their threshold income is also above £150,000, significantly higher than the current £110,000 threshold income level.

‘So why is this change potentially so significant? Well this change, if confirmed, is certainly very welcome news and will solve part of the problems facing the NHS, whilst increasing the scope of pension funding for many other higher earning individuals.

The adjusted Income figure includes income from all sources, plus any employer pension contributions, meaning that someone earning above £110,000 could be impacted if their employer contributions are close to, or above £40,000 per tax year.

‘However, the threshold income represents income from all sources less any personal contributions made into pensions.’

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