Government urged to reform pension tax rules as GPs shun work to ward off tax penalties

Employers across the NHS have written to Chancellor Rt Hon Nadim Zahawi calling for urgent changes to how NHS pension taxes are calculated. There is mounting concern that rising inflation is exacerbating the health service’s workforce crisis, particularly among GPs, because of its effect on defined benefit pensions.

As rising inflation boosts pension benefits, so many doctors have seen their savings approach or breach annual and lifetime pension allowances, with the increased tax charges that triggers. This in turn is leading many to reject additional work (which is currently at a premium in the effort to clear backlogs) and / or retire early, according to NHS Employers, which represents organisations employing 1.4million people across the health sector.

Gary Smith, Director of Financial Planning at leading UK wealth manager Evelyn Partners, comments:

“There can be no doubt that reductions to both the Annual and Lifetime Allowances have had detrimental effects to high-earning members of pension schemes, such as the NHS Pension Scheme, resulting in increased tax charges and reduced pension. This has resulted in senior NHS staff and GPs opting to turn down work or retire early, in order to minimise the impact of these tax charges, which has the knock-on effect of a shortfall in capacity.

“There have been attempts to try and alleviate this problem by increasing the tapered annual allowance threshold from £150,000 to £240,000, but rising GP incomes from the Covid vaccine programme have resulted in the tapered annual allowances of only £4,000 kicking in for many, and the increased tax charges that realises. For those who have opted to have these tax charges paid for using the ‘scheme pays election’, rising inflation will increase the impact of this election on their pension benefits and could also result in members opting to retire early.

“It is not all bad news, however, as rising inflation will potentially benefit some members of the NHS pension scheme, with falling Annual Allowance inputs. This is due to the way in which the Annual Allowance inputs are calculated for members of defined benefit schemes, such as the NHS Pension Scheme. It is not the amount that is actually contributed, but the deemed increase in the value of the pension benefits that is tested.

“Effectively, pension benefits are calculated at the beginning of the year and then increased this by the consumer prices index rate of inflation, using the figure from the previous September. As CPI inflation continues to rise, this will result in the opening value being higher, which will potentially reduce the deemed increase, to the benefit of the NHS pension member.

“Ultimately, changes to pension legislation have increased the tax burden – or the threat of tax charges - on senior NHS staff and this has had the knock-on effect of forcing many to retire early or turn down additional hours. One potential solution would be to apply different rules to defined contribution and defined benefit pension schemes."