NHS shows our pension tax strategy is in a cul-de-sac.

Kat Lay’s article on NHS pensions in The Times yesterday has sent alarm bells ringing at the FT. Kat suggests that the rules around the Annual Allowance that have been flagged by the BMA for the past four years are actually going to be “overhauled”


A report in the The Times on Saturday said that ministers were preparing to announce other changes to tax and pension rules in an attempt to stem the departures of senior staff. The report suggested that the government was also considering allowing staff at any level to exchange some of their pension for additional pay in the hope of retaining nurses and other lower paid workers amid a cost of living crisis.

Selective tinkering with pension taxation rules to get the country through a tough winter may be expedient, but considering the general review of pension taxation promised in 2015 was canned in 2016 , those of us working in pension may consider it “opportunistic“.

Pensions are tough to tax because – save for the unfunded schemes like the NHS, they provide limitless opportunities for the financial services industry to extract rents to fund their and their wealthy client’s lifestyles. Incentivising the increased prosperity of a fortunate few out of general taxation is a problem Osborne and Cameron set out to tackle and they failed, foiled by their own back-benchers, keen to keep pension privileges for the mass affluent.

It is a bizarre and unseemly sight to watch pension taxation reform attract Governmental attention because a certain group of  medics are having problems with getting too much paid to them as pensions. But that is what is happening.

If the only way that the NHS finds to retain nurses is by incentivising them to give up pensions, what message is Government giving to the millions struggling to pay into a workplace pension pot ?

The Government appear happy for 1.7m low paid savers to lose out on incentives amounting to 25% of personal contributions, presumably because they are not politically important. Of course a proportion of those 1.7m are part-time employees working for the NHS. There is no sense in this.

Six years after canning a proper reform of pension taxation we are left with piecemeal measures that are blatantly unfair to the low paid (witness the delay implementing the net pay anomaly) and are targeted to plug a leak that need never have sprung.

The Annual Allowance , Money Purchase Annual Allowance and Lifetime Allowance are items of pension legislation designed to limit the negative impact of a regressive pension taxation system that means that the poor pay the pensions of the rich. Specifically, pension contributions can be used to avoid wealth taxes such as higher rate income tax, CGT and IHT. This avoidance puts pressure on the Treasury to increase taxes on the poor – most noticeably VAT.

This blog and just about everyone else in pensions called for a “radical overhaul” in pension taxation to happen. Some of us argued for a gradual shift from EET to TEE, others looked to restrict higher rate tax relief on contributions , all proposals looked to ensure that the poor do not pay for rich people’s retirement.

Contrary to generally accepted wisdom, the opportunity cost of the £42bn not collected by HMRC because of pensions, is mainly attributable to tax and NI breaks to employers

Only £7.4 bn. of the £41.8bn net cost is attributable to employee contributions

It is a little crude to present the interests of employers as primarily those of the ruling elite, but whether private or public sector, that’s how most people see it.

It is why we still have a pension system that works via payroll deduction and the payment of pensions by pension schemes. It is why the erosion of that system through the closure of DB pensions in the private sector is creating such rancour and it’s why the Government failed so miserably in 2016 when it decided to kick this can down the road.

Now 6 years later, the can is at the end of the road, certainly for NHS consultants and other senior staff (including some GPs). These employees find themselves in a cul-de-sac where working means losing more in pension rights than can be paid to them. You cannot blame them for not going out to work to get negative net pay but you can blame a Government who was warned this would happen and decided to do nothing in the interests of self-perpetuation.

A time to look again at pension taxation?

Other than to react to the next crisis, it would be good to see this Government, with its big majority, putting in place a proper reform of the pension taxation system. I don’t think it will because it has too much else to swallow.

We have a ruling party, who’s leadership has  been opportunistic now for over a decade, failing to show a strategy on how we fund pensions and social care in a credible way. We are as far from Beveridge as we can be, there is no holistic picture, only a series of frantic policy initiatives as those described by the Times that can only make pension taxation, more complex, less comprehensible and less trusted.

Whoever we get as the next Prime Minister , and the latest odds suggest it might just be Liz Truss, pension taxation needs be an issue.

Pension taxation must be a matter of the moment. But please,  can this moment lead to a return to the pension taxation review of 2015-16? We have unfinished business to sort out.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to NHS shows our pension tax strategy is in a cul-de-sac.

  1. con keating says:

    Henry You should be a little careful when citing those HMT tax cost tables as their calculation may be considered misleading. “The cost of the tax relief is calculated as the tax that would be paid on contributions to registered pension schemes presuming they were not registered and the payments were subject to the normal tax
    rules applying to individuals’ remuneration.” This is higher, as there are higher rate taxpayers among scheme members, than the rate of corporation tax.

    • Derek Scott says:

      John, a pension in payment from the MP’s CARE Section (from 2015) or the Ministerial Pension Scheme is paid monthly, in arrears, and (except for a child’s pension) will usually be paid for life. It will be increased each April in accordance with the relevant Pension Increase (Review) Order made under the provisions of the Pensions (Increase) Act 1971. The increase will be pro-rated for any pensions that have been in payment less than 12 months.

      The 2022 increase was 3.1% based on previous year’s September CPI.

      The 2023 increase will presumably be based on CPI as at 30 September 2022.

      But there are still a number of defined benefit schemes with RPI increases: for example the Mineworkers’ Pension Scheme suggested to their members an indicative increase of 11.8% in 2022 or 2023.

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