Advertisement

How the pension contributions annual allowance is crippling the NHS

NHS doctors are responding to the perverse financial incentives of the pension contributions annual allowance scheme by just not doing any extra work. The system needs fixing. And not just for doctors.

Doctor walking away from camera © Christopher Furlong/Getty Images
Many doctors are simply walking away

It's a bad time to be needing an operation in the UK. Waiting lists have risen "up to 50%" in England; consultants are refusing to do any unplanned work or overtime; and delays on the are "becoming increasingly common" says the BBC. They are also beginning to retire earlier than they did.

Advertisement - Article continues below

Why? Because that is what the financial incentives we are giving them tell them to do.

We have long had a system in the UK that limits the amount anyone can contribute to a pension scheme and still receive tax relief every year. It started out at a very high level £255,000 in 2009-2010 so almost no one had to worry about breaching it. Then it started to fall to £40,000 now.

Then in 2016, George Osborne did something very silly. In an attempt to show that he was as keen to make the well paid suffer financially as everyone else, he introduced a taper to this. It sounded simple(ish) at first. Anyone earning over £150,000 would gradually have their allowance cut until, at £210,000 it would be a mere £10,000.

The system is overly complicated

It is actually anything but simple. There are complications around what makes an income of £150,000 earn more than £110,000 (the threshold income) and you are automatically in the firing line for the taper.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

That's something people with defined contribution pensions and one main source of income can usually mitigate they know if they will breach it with their auto-enrolment from their PAYE jobs for example and ask for cash in lieu of pension.

It's still a huge pain for anyone with variable income (if you don't know what your earnings will be in any one year you can't know what your tax-free pension allowance will be) but that disincentive for private sector workers to take on extra work is not, of course, a big enough problem for the front pages of the paper.

Public sector pensions are a different matter. They are mostly pretty generous (this is where much of the tax relief goes) and the taper was introduced in part to address this (you might say it would just be easier to make them much less generous rather than complicate things at the other end but you are not a politician). But that's the thing that causes the problem.

Advertisement - Article continues below

Doctors often have no idea if and when they will go over the taper. The pension contributions made on their behalf are high; their schedules and overtime payments in particular are uncertain; and any growth in the value of their pension (something that is outside their control) gets added to the income calculations and ups their risk. And when they do go over the taper they get a bill: that charge needs to be paid in the year that it is incurred. This is the real killer.

Advertisement
Advertisement - Article continues below

In theory you should come out evens from paying the penalty tax. The pension contributions are still made; you benefit from their capital growth tax-free until your retirement; and in the long term that should result in you having the same amount of money you would have had if you paid ordinary income tax on it in the year it was earned. The problem then, in the main, is a cash flow problem: you have to pay tax now on money you won't get until you retire. And a lot of tax, at that. Some public sector workers have reported bills of over £80,000.

Advertisement - Article continues below

It is, I know, hard to have sympathy with people on this kind of income and with the kind of pensions on the way that these tax bills suggest they have on the go. And it is possible for them to ask their schemes to pay the bill and to reduce their pension accordingly but this comes with high interest rates (it counts as a loan) and with endless admin.

Anyway, it doesn't really matter whether one has sympathy or not. If the pension system means that doctors are incentivised not to work, and that our already unsatisfactory health system is becoming even less satisfactory, something must be done.

Possible solutions

We are very against an NHS-specific solution to all this. It affects all high earners and it's a level of boring admin that is entirely unnecessary.

Our own view is that the taper system and in fact the entire annual allowance system should be abolished. Any reduction in the tax take can be dealt with by simply reducing the lifetime allowance to a more suitable level (bearing in mind that the point of tax relief on pensions is to encourage us to save enough to prevent dependence on the state in old age and nothing more). This would irritate everyone with defined-benefit pensions, of course, but would not have the same nightmare annual cash flow issues as the taper and annual allowance do.

Another possible option is to change the tax relief on contributions so that the cost is less skewed towards high earners 25% for everyone, perhaps, rather than 20% for low earners and 45% for very high earners.

Yet another is to cut the income-tax-free lump sum you can get from your pension when you are 55. It's currently 25% but there is no obvious reason for it not to be 10% 15% or 20%.

Hammond has ruled out all these things. The best he has done so far is to suggest ways to make the NHS system more flexible (spot the oxymoron). Hopefully, the next chancellor will be less of a twit. If he isn't, it won't be long before every senior doctor in the NHS is spending an awful lot more time on golf courses than in hospitals.

Advertisement
Advertisement

Recommended

What are the best ways of raising more money in tax?
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
What are the biggest mistakes investors make when it comes to tax?
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
How tax has shaped the course of human history
Economy

How tax has shaped the course of human history

Taxation is as old as civilisation itself. But how much is too much? Dominic Frisby looks at how taxation, war and society have evolved together over …
16 Oct 2019

Most Popular

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery
Gold

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery

John and Merryn talk about how it's perfectly reasonable to expect a V-shaped recovery and to continue holding gold as well. Plus, inflation, staycati…
30 Jul 2020
UK banks have had a shocking week – so it’s probably a good time to buy
UK stockmarkets

UK banks have had a shocking week – so it’s probably a good time to buy

Lloyds Bank reported a £676m loss this week. And, with all of the UK's high street banks having a terrible time of things, bank stocks are detested ri…
31 Jul 2020
The charts that matter: gold finally sets a new record high 
Global Economy

The charts that matter: gold finally sets a new record high 

As gold surges past its previous high, John Stepek looks at how it's affected the charts that matter most to the global economy.
1 Aug 2020