MPs call for tax-unregistered NHS pension scheme

In a House of Commons debate on July 13, Conservative MP Dr Dan Poulter raised the issue of pension taxation rules and the NHS Pension Scheme.

“One of the biggest threats to the retention of the most senior and experienced NHS staff is the punitive and unfair interplay between long-standing government pension taxation policies and the NHS Pension Scheme,” he told MPs. 

“Those policies, and the punitive financial penalties that result from them, will cause many senior NHS workers to take drastic steps, such as reducing hours, leaving leadership roles or taking early retirement.”

Unfair interactions between pensions taxation and NHS pension scheme regulations remain

Dr Dan Poulter, Conservative MP

The standard NHS pensions annual allowance is £40,000. A taper lowers the annual tax-free allowance for pension contributions from £40,000 to as low as £4,000 for those earning an “adjusted” income of more than £240,000 and a “threshold” income of more than £200,000. 

Those that cross the limit are hit with tax bills. Members also face a lifetime allowance of £1mn.

Poulter called for a tax-unregistered top-up scheme, an idea that has also been supported by the British Medical Association. Last year, the government introduced a tax-unregistered scheme for judges.

The BMA admitted that this would mean no tax relief on employee contributions — which doctors do not currently receive due to the tiered contribution rates — but added that pension savings would then not be tested against the annual and lifetime allowance tax.

The Tory MP suggested to the government that only growth above inflation should be tested against the annual allowance.

He also argued that for the 2022-23 period, the NHS across all four nations should replicate an arrangement for 2019-20, which “recognises that the annual allowance charges are largely based on non-existent pseudo-growth”.

Doctors are being advised to retire

A joint survey by the Royal College of Physicians, Royal College Physicians Edinburgh and Royal College of Physicians and Surgeons Glasgow revealed in 2019 that 45 per cent of doctors surveyed had elected to retire at a younger age than previously planned, with 86 per cent citing pension concerns as a motivating factor.

Poulter warned parliament that current pension tax rules will lead to senior NHS workers aged 59 or 60 losing more than £100,000 from their pension pots if they delay their retirements by one year, instead of retiring this year.

“That is resulting in senior and experienced NHS workers being advised by actuaries and accountants to reduce their working hours in order to avoid being hit by huge pension tax bills that will see them working for little pay or, in some cases, no pay at all,” he said.

NHS England and NHS Improvement previously amended pension rules in recognition of the impact pension tax regulations have had on employee retention, particularly to help clinicians work additional hours without incurring resulting charges. 

For the 2019-20 tax year, it agreed that members of the NHS scheme who faced tax charges on the growth of their benefits as a result of work carried out during the period — which took them above the annual allowance — to have these charges paid for by the scheme, with a corresponding amount also paid on retirement. 

Poulter’s support for implementing this arrangement in 2022-23 followed the RCP’s call for this solution to be extended over the next two to three years until more concrete changes to the rules are made.

He pointed to the use of two different inflation measures in the NHS scheme. The current rules use a different consumer price index value for the opening value, which is based on the CPI rate in September last year, whereas the revaluation of earnings that is built into the scheme is based on the CPI rate in September this year. 

“When inflation is stable, last year’s CPI rate and this year’s are similar, so that does not usually present a major problem,” Poulter said. 

“However, when inflation changes rapidly, as is happening now, it becomes a very significant problem for many GPs.”

He also hit out at the government’s decision in March 2020 to lift the annual earnings taper thresholds to £200,000 and £240,000, from £110,000 and £150,000 respectively.

“Pensions experts were clear at the time, and have been ever since, that although this approach mitigates some of the issues around the taper, it is not an effective solution to issues with the annual allowance, as the unfair interactions between pensions taxation and NHS Pension Scheme regulations remain,” he noted. 

“Crucially, it does nothing to affect the punitive effects of the general annual allowance.”

Hard to justify more support ‘in the current climate’

Responding to Poulter, economic secretary to the Treasury Richard Fuller said that the government had a duty to all UK pension savers, and that the current use of September CPI for measuring inflation in the year before the tax year provided certainty to savers.

He added that the temporary tapered annual allowance in March 2020 would cost £2.2bn over five years, and “was targeted at the very highest earners in society. It will be hard to justify focusing more government support on them, especially in the current climate”.

In response to the call for a tax-unregistered scheme akin to the judges’ scheme, Fuller observed differences between NHS staff and judges. 

“There are unique circumstances relating to judicial appointments — in particular, that judges are unable to return to private practice after taking up office, and that many judges take a significant pay cut to join the judiciary,” he said.

Poulter nevertheless had the support of his colleagues across the political spectrum during the debate. 

Scottish National party MP Amy Callaghan said that more than 100 of her constituents had been in contact with her on the issue, while Democratic Unionist party MP Jim Shannon said that it was “a really important issue that affects many of my constituents”. 

The NHS Business Services Authority has been disrupted by a spike in retirement applications linked to the end of coronavirus pandemic pension protections. It admitted in June that a 35 per cent jump in retirement applications has delayed its handling of applications.

In March 2020, the government introduced measures to allow recently retired NHS staff to return to work to tackle the pandemic without suffering a penalty on their pension, but this temporary suspension came to an end on March 24.

In January 2022, Quilter predicted that more than 7,000 doctors and nurses could be affected by the protections coming to an end, suggesting that they could choose to retire as a result.

Some members of the NHS Pension Scheme are allowed to retire at age 55 without any cut to their pensions. But in normal circumstances, retired doctors or nurses returning to work can see their NHS pension reduced under a process known as “abatement”.