“No” is a very short word.
The Government has decided to say “no” to calls for further reform of the Annual and Lifetime Allowance as they impact the NHS pension scheme. “No” is a short word but this is a long response which suggests that the Government recognizes the fragility of the position it has and is adopting.
The calls for change had come from the higher earning doctors who found they could be subject to penal tax rates that made working for the NHS financially unfeasible. In some cases these high earners could earn less for working harder and longer.
I’ve read the the consultation response and here is a summary of what’s said and some of my thoughts woven in. This blog concerned itself on this issue throughout 2019 and I know it is still read by many in the medical profession.
This consultation response explains why the Department of Health and Social Care feel it can say “no” and at this time there is little right of reply. However, the response does not provide a cure but a sticking-plaster, the underlying problem of a broken taxation system will need proper surgery
The NHS’ digitally aware workforce
It’s worth noting that of “Over 2,200 responses were received in total. 1,160 were submitted through the consultation platform, 1,209 were received via email, and none by post…the majority were from individual doctors and senior clinical staff. Anyone who has spent time on the wards is aware of the vast differences in education and digital competence between senior doctors and that of orderlies.
A consultation like no other
These highly engaged workers responded to the consultation in a very sophisticated way. Both in terms of numbers and in terms of the sophistication of response, this seems to have been a consultation like no other.
Most respondents took the view that providing flexibility was no substitute for tax reform…. The consultation presented the rationale for the lifetime and annual allowances, which are designed to restrict the amount of pension saving that can be made tax-free. While the consultation did not specifically invite views on these tax policies, the vast majority of consultation responses did comment upon them and made suggestions on how the pension tax issue should be solved.
Perversely, a central argument of those responding was that they were unable to make head or tales of their tax position without the help of pension experts.
The BMA stated that the taper mechanism is beyond the comprehension of the most experienced accountants and tax advisors. This view was supported by a large number of public respondents who argued that it should not be so difficult to make an accurate estimate of pension tax liability, which is currently challenging without taking formal financial advice.
Among those making this observation was Ros Altman who argued that the Annual Allowance should be calculated against previous not current year earnings, allowing those affected to prepare.
The Government adopted an emergency tax solution to the problem. It announced at Budget in March 2020 that the tapered annual allowance thresholds would increase by £90,000 from 6 April. The threshold income and adjusted income thresholds increased to £200,000 and £240,000 respectively. It claims that this is removing up to 96% of GPs and 98% of consultants from the taper calculation based on their NHS income.
At the time, this was considered a sticky-plaster solution to park the problem while we were in the grip of the pandemic. The solution addressed NHS earnings, but not the total earnings of the highly skilled doctors (the doctors who responded in such numbers)
The Government has decided to stick with the budget sticky-plaster
The Government has now decided to stick with its 2020 budgetary measures arguing that
A tax solution to address the taper issue is the simplest to understand and administer; it directly targets the issue that has been raised, is fairer across different workforces and retains appropriate limits on tax-free pension saving for the very highest earners. As a consequence, the pension flexibility proposals set out in the consultation document will not be pursued.
This will doubtless anger those who had gone to trouble to propose alternatives. It will also frustrate those who consider the tax-system ripe for wholesale reform. In short, the Government has done what it has been doing for the last 40 years and ducked the issues of a changing workforce by tweaking the EET model.
The Government is clear about how those doctors who take on private work on top of NHS pay and pensions, should go about meeting and planning for tax liabilities. They should use the “Scheme Pays” facility where the tax is paid for by the scheme , effectively mortgaging the pension at rates set by the Government Actuary
Although Scheme Pays will reduce the value of the pension accrued, the growth in benefits represents a good return on the contributions made. Members are encouraged to seek regulated financial advice to explore their tax position and make informed choices about their pension.
Scheme Pays has long been considered by the Treasury , a very useful get out of jail card for itself, the NHS and for the highly paid doctor. It had even been mooted as a means to transition from EET to TEE without creating cash flow issues for higher earners. I am not surprised the Government consider it fit for purpose as it relies on doctors and senior staff’s engagement and awareness. The Government can point to the consultation responses as evidence of that.
Similarly Government has little sympathy for the argument that senior staff should have flexible accrual of their NHS pensions to mitigate tax bills. It saw this as a rich person’s problem and that there was no evidence of members of the pension scheme opting out en masse because they couldn’t afford to stay in. The clear implication was that the impact of private earnings on the senior doctor’s NHS pension was their business not the Government’s.
There is not space in this article to deal fully with the various rebuttals of proposals made to the various solutions that had been put forwards in the Government’s initial consultation. But a blanket statement of the Department’s position is included
The department recognises that the proposed flexibility would have created a degree of complexity for members in deciding the optimum level of pension growth to target based on their personal circumstances. Operating the flexibility would also have caused additional complexity for payroll providers and the scheme administrator in deducting the correct contributions from members and processing flexibility elections including revisions. The tax solution implemented by government therefore removes the need to introduce an additional layer of complexity.
Critics of Government’s approach will argue that this is a slap in the face to the people who have done more than any to ensure our hospitals made it through wave one and two of the pandemic and this paper will do little to motivate them to see us through a wave three.
There are certainly many solutions in the original consultation that seem to have been dismissed because the Treasury simply did not prioritize this problem compared to the manifest problems facing the NHS resulting from the strain it has been put under over the past twelve months.
The long paper (presumably from GAD) showing the impact of scheme pays , is extremely helpful in understanding how a modeler could be developed but looks like an appendix. The consultation response could have done with an executive summary and half the length, “No” is a very short word.
For all the response’s decisiveness, it looks to me that these pension problems are not going to go away and that the 2020 reforms of the Annual Allowance and its taper do not properly resolve the fundamental issues that will drive highly trained and skilled doctors and clinicians away from the NHS.
The sticking plaster will have to do for now. The Budget measures can only staunch the bleeding, they cannot cure its cause.