The tapered annual allowance: creating a pensions ‘apartheid’?

Published by James Jones-Tinsley on

Estimated reading time: 4 minutes

The tapered annual allowance (TAA) has been the subject of much criticism throughout the year. Stories have emerged in the national press about doctors and clinicians in the NHS refusing to take on additional shifts because of punitive income tax charges that the extra work could cause.

First introduced in April 2016, the TAA is also leading to some senior clinicians withdrawing from the NHS Pension Scheme. Worst of all, it’s causing others to leave the NHS altogether. 

There is therefore a real risk that the NHS is losing valuable expertise and experience – all because of the way the pension tax system currently works. 

The TAA is complicated, some would say too complicated. It is aimed at ‘high earners’ and involves adding up various sources of income and pension contributions to see if the total exceeds £150,000 per tax year. If it does, the individual’s annual allowance of £40,000 gross per tax year is then tapered, so that those with an ‘adjusted’ income of £210,000 per tax year or more only have an annual allowance of £10,000.

This increases the chance of someone exceeding their TAA, where they are a member of a pension scheme that receives regular (and significant) employer and employee contributions. Those contributions that exceed their TAA are then subject to an income tax charge at the individual’s marginal rate.

The difficulty in knowing whether the TAA is exceeded is further compounded where earnings include irregular overtime and extra shifts, as well as pension benefits accruing within a defined benefit environment. 

Two developments have now brought the TAA into even sharper relief. One is the general election that is due to take place on 12 December 2019; ostensibly called to clear the Parliamentary log-jam created by ‘Brexit.’  

The second is the publication of NHS performance statistics in early November, which showed that key targets continue to be missed, with waiting times at their worst levels on record. This situation exists even before the typically busier winter period begins.

Although HM Treasury was already reviewing the TAA with pension industry representatives when the general election was called, news has now emerged that the Government intends to pay the excess pension tax bills incurred by NHS clinicians in England during the 2019/20 tax year. It is hoped that this will encourage GPs and consultants to take on extra shifts this winter.

The Government plans to ‘pay’ the tax bills via the NHS Pension Scheme (‘the Scheme’), through use of the ‘scheme pays' process. As the name suggests, this means that the Scheme pays the tax bill to HM Treasury, rather than the NHS employee, in return for a proportionate reduction in the employee’s pension at retirement. For this tax year, however, the Government will make good any reduction in pension to annul the tax bill.

A knee-jerk reaction to pensions tax? 

The Government’s decision, in the middle of an election campaign and in order to avoid a winter crisis in the NHS, only serves to highlight the complexity of the current pension tax system.   

Arguably, if the Treasury had abolished the unpopular TAA earlier, the need to invoke this emergency ‘solution’ could have been avoided. 

However, more worryingly, any move to appease NHS staff by singling them out for special treatment risks creating a ‘pensions apartheid’ that was previously prevalent prior to ‘A-Day’ in April 2006. 

Creating a ‘pensions apartheid'?

As news of the impact of the pension tax rules on NHS staff spread, other high earning public sector workers weighed into the debate, including members of the armed forces, as well as civil servants and teachers.  

The message from other public sector workers was clear; doctors were not the only ones affected by the TAA. This increased the clamour for it to be scrapped.

Of course, the NHS holds a special place in the nation’s heart, meaning that negative stories regarding it attract an emotive response amongst the electorate and command media attention.  

Conscious of this, the government has already announced a halt to further reductions in the Corporation Tax rate, in order to direct extra funding to the NHS.

The danger of the Government’s latest strategy is that a queue will form outside 10 Downing Street, made up of different categories of public sector workers, each demanding similar treatment regarding their pension tax bills as that afforded to NHS staff.

Fair treatment for workers

The reality is that non NHS public sector workers are less visible within the electoral narrative and, therefore, are more likely to be ignored. This applies, for example, to the armed forces because we live in peace time, or firefighters because the political decision-makers’ houses aren’t burning.  

This is unfortunate and I strongly believe that everyone affected by the TAA should be treated the same, regardless of their rank, profession or earnings. The only way to achieve this is for the TAA to be abolished. 

Pension planning for senior NHS staff

Worried about the NHS pension 'tax trap'? Doctors and senior NHS staff can read our full guide to help make sense of the Tapered Annual Allowance and other NHS pension tax rules.

Find out more

Further reading