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From sticking plaster to long-term solution?

While the Government has sought to help doctors caught out by the annual allowance solve their tax problems this year, uncertainties remain and a long-term answer is still keenly awaited.

The intricacies of doctors’ pensions don’t usually trouble the front pages of the newspapers, but for a while in the autumn of last year, the row over pension tax charges for doctors threatened to derail the Conservatives’ election campaign. Ministers found themselves planning an election at a time when some doctors were warning they couldn’t take on extra work during the busy winter period for fear of a punitive tax bill. In extreme cases, doctors have even been retiring early because of the pension trap.

In fact, this has been a running sore for many doctors, with pension experts pointing out in 2018 that five times as many people were leaving the NHS Pension Scheme as other public sector pension schemes, partly because of the tax issue.

The issue being the annual allowance on pension saving, which in the context of the NHS scheme limits the amount by which the value of members’ pension benefits may increase each year without suffering a tax charge. For many doctors, this allowance is £40,000, but a tapering system applies to higher earners, reducing their allowance to as little as £10,000. As a result, some doctors found that taking on extra work – and receiving additional remuneration for this work – was landing them with a significant tax bill. This extra remuneration, which is not usually pensionable, had the effect of reducing their allowance via the tapering system and therefore increasing their pension tax liability with no benefit to their pension.

The good news is that the political climate has finally forced the Government to take the issue seriously. Previous solutions, including allowing doctors to accept lower pension benefits in order to avoid the tax charge, did not find favour, particularly since only some NHS employers chose to implement this scheme by offering to recycle their subsequent pension contribution savings into doctors’ pay instead.

However, in November, the Government responded with a short-term proposal to resolve the crisis for now and a commitment to introduce a longer-term solution from the 2020-21 tax year onwards.

Solving the problem one year at a time
The short-term solution recognises the fact that under existing pension system rules, known as “Scheme Pays”, doctors are entitled to ask the NHS Pension Scheme to cover the cost of their annual allowance tax charges today, on the understanding this cost will be recouped when they begin drawing their pension. The Government has now said, in effect, that it will make good any future loss in pension related to annual allowance tax charges for the 2019-20 tax year where doctors have used the Scheme Pays rules. Unfortunately this rule only applies to members of the NHS Pension Scheme in England and Wales. Scotland currently offers the option of recycling employer contributions for part of the tax.

In other words, doctors in England and Wales incurring additional annual allowance charges this year don’t have to pay them today and won’t lose pension because of them in the future.

So far so good, but some doctors voiced concerns. In particular, could they be sure future governments – potentially many years into the future – would honour today’s commitment? In December, the Government’s health secretary Matt Hancock felt compelled to allay such fears with a promise of provisions ensuring that even if an NHS trust or foundation ceases to exist, its pension liabilities in this regard will be transferred to another NHS body, or the Secretary of State for Health.

For its part, the British Medical Association is now happy with this fix. Its legal advice is that the Government’s proposals for dealing with tax charges arising in the 2019-20 tax year can be relied upon, both now and in the future. It’s also considered whether the proposals might cause any unforeseen tax issues for doctors but has not identified any problems.

That’s not to say the solution is perfect. The Government is still to clarify exactly how the rules will apply to those in primary care. There is also uncertainty over whether the Government’s original proposals for greater flexibility around pension contributions, with or without employers recycling contributions into pay, will go ahead. More detail is required here.

What about the future?
As for the longer term, this is a case of watch this space. The Government has promised to unveil the results of a broader review into the NHS’s pension problem in its first Budget, scheduled for 11th March. As a result, no firm details of its plans beyond the 2019-20 tax year are available.

There is some speculation that the Treasury will opt for an easy fix, such as increasing the thresholds at which the tapered annual allowance kicks in, perhaps by moving the qualifying income level up from £110,000 to £150,000. However, while this would mean far fewer doctors are caught up by the complexities of the taper, or unwittingly landed with tax liabilities, some would still be affected. Such a proposal might not satisfy everyone.

Still, pension experts and doctors’ advisers are reserving judgement until the Budget is announced. With relatively little time between Budget Day and the beginning of the new tax year on 6 April, it will be important to analyse the detail of the Government’s proposals quickly and carefully – and to respond where necessary. This is an issue that looks set to run and run.

Content correct at time of writing and is intended for general information only and should not be construed as advice.

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