Think thank Policy Exchange has advised the next prime minister to revise the relationship between the consumer price index and the annual allowance for public sector pensions, in a move that could help to limit the number of GPs and consultants retiring early to avoid punitive taxes.
NHS pensions are subject to an annual allowance of £40,000, with those that exceed this threshold subject to additional tax.
The legislation originally ensured that only growth above inflation was assessed, as the rate of CPI used to revalue benefits in the career average revalued earnings section of the NHS Pension Scheme was the same rate of CPI used to uplift annual allowance calculations.
This changed in April 2016, however, when pension input periods were altered to align annually from April 6 to April 5. These are the periods over which the amount of pension saving under an arrangement is measured.
Doctors are on the receiving end of complex pension tax bills, resulting in some doctors essentially working for free
Dr Iona Collins, BMA
Unintended consequences
“This caused a disconnect in the rate of CPI used for annual allowance calculations and the rate of CPI used to revalue CARE benefits in the NHS pension,” the Policy Exchange said in a report published on August 22, which set out a number of health and social care policy ideas for the winner of the Conservative party leadership contest.
CPI disconnect occurs as the “closing value” from the prior year’s pension increases by the previous year’s September CPI (in this case 3.1 per cent), observed Dr Tony Goldstone, deputy chair of the British Medical Association’s pensions committee. However, accrual for a member in CARE is based on this year’s September value CPI value, which is likely to exceed 11 per cent.
“Hence the original intention of trying to measure growth only above inflation in [section] 235 of the Finance Act is not met, so it is no longer measuring real growth above inflation at all,” Goldstone said.
The Policy Exchange report argued that “the design of the legislation has created two unintended consequences”.
It noted that when CPI rises, members are now assessed for their growth in benefits including inflation. When CPI falls, the annual allowance growth may be negative.
“Negative growth is zeroed and cannot be carried across to other pension schemes within the same tax year or carried back to previous tax years to offset historic tax charges,” the report stated.
The think tank warned that the implications of this disconnect would affect all practitioner members of the 1995/2008 scheme and all members of the 2015 scheme, and not just the top earners.
According to Citi, inflation could exceed 18 per cent next year, which could hit a significant number of NHS workers with heavy tax bills.
The Policy Exchange suggested revising the “appropriate percentage” mechanism within the Finance Act 2004. “An appropriate percentage would be to match the rate of CPI used by a scheme to uplift its CARE benefits, which is either the rate of CPI before or after the tax year starts depending on the scheme,” it said.
The think tank added that the Treasury could also consider permitting negative growth to be transferred across to other schemes within the same tax year or carried back to previous tax years to offset historic tax charges. It said these required changes would lead to some reduction in the repayment charges to the Treasury.
“We would propose that the new administration commissions an independent review of NHS pensions and their interactions with taxation policy,” the Policy Exchange said.
“The review should commence in 2022 and report by January 2023 to inform the Spring Statement.”
A government spokesperson said: “The NHS Pension Scheme is one of the best available, providing generous retirement benefits for hardworking staff after a lifetime of service looking after our nation’s health, and the majority of NHS staff are able to build their pension tax-free.
“A small number of senior clinicians on the highest wages will exceed their allowances for tax-free pension saving, as is the case in other industries, and we continue to monitor retirement patterns and hours worked by staff. We keep the rules of the pension scheme under review.”
Welsh doctors unhappy with pay and pensions
The BMA revealed on August 23 that more than half of respondents to a BMA Cymru survey said they were likely to leave the Welsh NHS as a result of their recent 4.5 per cent pay award. Pensions tax rules have also pressured Welsh NHS staff, the union said.
BMA blasts Sunak role in NHS pensions taxation
The British Medical Association has hit out at Rishi Sunak for changes made during his time as chancellor of the exchequer to the tapered annual allowance of NHS pensions.
BMA Welsh council chair Dr Iona Collins said: “Doctors’ take-home pay has reduced over several years, making the NHS an increasingly unattractive employer.
“To make matters worse, doctors are on the receiving end of complex pension tax bills, resulting in some doctors essentially working for free and others finding out that they have lost money by going to work in [the] first place.
“This means that doctors cannot increase their usual working hours, resulting in no chance of making significant progress to reduce waiting lists.”
