“It is laudable that the government has taken notice of the cacophony of unhappiness erupting from the medical profession after they proposed the 50:50 rule to try and fix the NHS pension debacle. However, the fact that we now have a second set of proposals for consultation in the space of just a few months shows that the Department of Health is chasing its tail trying to remedy the disastrous fallout from the Treasury’s annual allowance taper. These proposals are still likely to leave many doctors dissatisfied, and they will continue to face complex choices to mitigate the effects of the poorly conceived tax policy implemented in 2016.
“And to make matters worse, government have not yet acknowledged that the same challenges are facing other sectors in just the same way. Even if their new proposals have merit they fail to address the fact that the taper is wreaking havoc across the whole public sector. Once again these proposals represent a sticking plaster that will only serve to fix the problem the NHS is facing. As our figures show judges and the military are both suffering with the exact same problem with 1 in 4 judges now breaching the annual allowance and just fewer than 4000 armed forces personnel also getting hit by the tax charge.
“The government’s own Ministers have rightly highlighted that there cannot be special tax arrangement for schemes in particular public sector vocations. The chief secretary to the Treasury, Liz Truss, has already acknowledged in parliament that creating different rules in the tax system for certain sectors is not a practical option as it risks discrepancies and tax arbitrage. And yet today’s proposals show that NHS scheme rules have been tweaked so that it offers scheme pays on any tax charge, whereas other schemes are only obliged to step in when the charge exceeds £2,000.
“Rather than fiddle around trying to find workarounds for this growing problem the Government should be looking to scrap the taper altogether as this is quite clearly the root cause of the problem. In one fail swoop you could alleviate this pension problem threatening the public sector.”
How does the policy work?
Introduced from April 2016, the policy reduces the annual allowance for pension savers with higher earnings, breaking the principal that all pension savers are entitled to relief at their marginal rate of income tax up to the same threshold allowance.
Instead, it penalises higher earners by curbing their entitlement to tax relief on contributions. Individuals with an ‘adjusted income’ of over £150,000 and a ‘threshold income’ over £110,000 are affected.
For every £1 of ‘adjusted income’ over £150,000 an individual loses 50p of their annual allowance. This tapering effect means someone with income of £210,000 is left with an annual allowance of just £10,000, a 75% reduction on the standard £40,000 annual allowance.
The controversial policy has resulted in dire unintended consequences for key frontline workers in public services, especially the NHS. The taper is particularly damaging for workers in public sector DB schemes because of the way their pension accruals are calculated.
A recent survey showed that nearly half of GPs had cut their hours to avoid triggering a punitive tax charge, while NHS trusts have reported delays to procedures because of staff shortages as a result of clinicians rejecting overtime.
Quilter has repeatedly campaigned against the policy, introducing a calculator to help savers navigate the tapered allowance, and calling on the newly appointed chancellor, Sajid Javid, to make reversing the policy one of his key priorities.
For more information on other public sector schemes breaching the annual allowance please see below: