Government offers temporary pensions tax reprieve to NHS workers in a bid to maintain existing resources levels
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)
2 December 2019
Following a decision by Health Secretary Matt Hancock, NHS England Chief Executive Simon Stevens set out details of the scheme in a letter to Trade Unions and Royal Colleges, and the Scottish Government announced that it is to allow a separate and distinct temporary reprieve under its devolved powers for Scottish NHS workers who can demonstrate they are likely to breach the pensions Annual Allowance threshold. Justine Riccomini explains.
Background
Growing evidence of senior NHS clinicians across the UK reducing their hours or in some cases, retiring early, has left NHS bosses and Trades Unions questioning the risk to senior resources levels in the service, presented by pensions taxation legislation, which is reserved to Westminster. The trend emerged because the clinicians affected were at risk of breaching their Annual Allowance (AA) pension savings threshold which would lead to a tax liability being imposed on the excess. To avoid this, many have chosen to reduce their pensionable pay by way of working less hours or giving up work altogether.
Winter Blues
In the face of the forthcoming Winter, which places an increased demand on the NHS every year, the prospect of reduced staffing levels was a grave cause for concern. However, the AA problem is a perennial one for senior clinicians. The Office of Tax Simplification included this point in its report of October 2019 and some senior pensions experts have called for the abolition or restructuring of the AA.
Consultation
The Department of Health and Social Care issued a public consultation on 11 September 2019 following representations made by senior clinicians. The consultation closed on 1 November 2019 and the results are currently being analysed. HM Treasury has also launched a review into the impact of the AA tapering provisions on all public sector pension schemes. The level of concern is so great that the Health Secretary and the Scottish Government decided to introduce interim measures for the entire 2019/20 tax year (effective from 1 December 2019 in Scotland), to offer senior clinicians an alternative to withdrawing their services and encourage them to maintain their existing levels of commitment to the NHS. The announcements were made in Scotland on 18 November 2019 and in England on 22 November 2019.
The alternatives for senior clinicians
In England, Wales and NI, the Government is offering to make use of the “Scheme Pays” method to allow the pension scheme to pay the tax liability and then reimburse the amount foregone to the clinician upon retirement by way of a binding contract. In Scotland, the interim measure being rolled out from 1 December offers an alternative option for senior clinicians who can prove they may be likely to breach the 2019/20 AA tapering provisions and as a result, face a tax charge. It involves them withdrawing from the NHS Pension Scheme and having their employer pension contributions paid to them as additional basic pay in lieu of pension contributions (Income tax and NICs will be payable on this value). In this way, they will not need to reduce their hours to avoid exceeding the AA and incurring a financial penalty. The interim measure is set to run until the end of the current financial year, 31 March 2020.
Recap on How Pensions Annual Allowance Taper works
AA effectively sets an upper limit which prevents the availability of full income tax relief on unlimited pensions savings. However, there is a difference between DB and DC schemes, in that for DB schemes, growth is calculated on the amount by which the pension entitlement has changed, whereas for DC schemes, growth equates to the amount saved (excluding the investment growth of the fund).
The AA is currently £40,000 for 2019/20, having reduced from £255,000 to £50,000 in 2011-12 and to £40,000 for 2014-15 et seq. This value can be tapered where the individual’s annual income (before tax, less any personal pension contributions, ignoring any employer contribution) is over £110,000. Unused AA can be carried forward for up to 3 tax years.
Individuals whose income is above £110,000 should next assess whether their adjusted income (i.e. all pre-tax taxable income, including dividends, savings interest and rental income plus the value of employee and employer pension contributions) is over £150,000. If it exceeds £150,000, the AA reduces by £1 for every £2 that the adjusted income exceeds £150,000, subject to a capped reduction of £30,000, which would apply to an income reaching £210,000.
The AA charge can be settled in two ways - dependent upon the size of the charge and the wishes of the taxpayer, it can be paid by the taxpayer through Self-Assessment or through the pension scheme using the “Scheme Pays” methodology – for the NHS, this treats the AA charge as a loan.
The calculation of the charge is also different depending on whether DB or DC based. GOV.UK has set out a calculator for this purpose. The Office of Tax Simplification’s October 2019 report pages 83-87 also provides useful commentary as to how the pensions AA tapering provisions play out in practice.
Possible downsides for some
In some cases, a pay rise could have the effect of incurring higher AA tax charge than the individual has actually received in additional pay as well as a restriction on the available tax relief. The OTS has recommended at para 3.75 of its report that one possibility to remedy this could be for the AA to apply only to DC schemes and the Lifetime Allowance to apply only to DB schemes, to make the process administratively and operationally easier. An excellent example of AA charge exceeding pay rise is set out at Annex D pages 92-92 of the OTS report.
Conclusion
This situation is a very good example of tax policy affecting taxpayer behaviours, which then results in a direct public service impact. The outcome of the consultation will no doubt be available in the New Year and we will be able to see what remedy the Treasury proposes. Clearly, removal of the unintended consequences of a tax measure which is currently resulting in resourcing, recruitment and retention issues within the NHS is necessary. Any changes to the NHS pension scheme require the express consent of HM Treasury. The NHS is not the only sector with these problems - but its problems have been highlighted by the media. The interim measures are likely to cost the NHS hundreds of millions of pounds, UK-wide.
Detailed FAQs are available at www.england.nhs.uk/pensions.