First published by The Herald on Sunday on 31 March 2019
NHS Scotland is facing a staffing crisis at the senior end because consultants across the country are shunning the extra shifts required to clear waiting list backlogs for fear of triggering complicated pension-related tax charges.
Under changes made to legislation in 2016, the tax-free amount that can be saved into a pension each year tapers from £40,000 to £10,000 for higher earners, with anyone in breach of those limits having to pay a charge to the Treasury.
The rules were introduced to stop the wealthy disproportionately benefiting from tax breaks that were designed to encourage pension saving. However, due to the complex way in which the charges are calculated many doctors are having to pay more in charges than they have received for working extra shifts, with the British Medical Association (BMA) noting that in one instance a consultant triggered a £9,000 charge by earning just £2,000 in overtime.
“These pension rules are simply wiping out any of the small pay increases awarded and removing any incentive to do extra work,” said Simon Barker, chair of the BMA’s Scottish consultants committee.
“Trying to help reduce waiting lists by taking on an extra clinic for one session a week for six months can lead to a significant tax charge for breaching the annual allowance, which outweighs the earnings from undertaking this additional work for the NHS.
“It means that by devoting their time to do extra work for the NHS, doctors could actually stand to lose money. I have heard this on a regular basis – and the result is that consultants are either cutting their working hours to avoid these huge tax penalties, or in some cases, deciding to retire altogether.”
Figures provided by the Scottish Government’s Scottish Public Pensions Authority (SPPA) give an indication of how widespread the problem is. Anyone liable for a charge can ask the pension scheme to pay it on their behalf, with the interest-bearing loan ultimately reducing the amount of pension they will be entitled to in retirement. In the 2015/16 tax year the NHS pension paid just over £140,000 on behalf of members, with that figure rising to £4.2 million after the rules changed in 2016. The scheme paid out £2.5m in the 2017/18 tax year.
It comes at a time when, in addition to there already being 375 full-time equivalent consultant vacancies across Scotland, senior consultants are also choosing to retire early rather than breach the pension lifetime allowance. That limits the amount that can be accrued in a pension across an entire working life without incurring additional tax charges.
Andrea Sproates of financial advisory business Chase de Vere Medical said there had been a “significant increase” in the number of doctors “taking the step to retire early because of lifetime and annual allowances tax charges”.
“It is the most experienced doctors who are affected the most as they have higher earnings and have already accumulated greater pension benefits. This also means that they will be most able to retire,” she said.
Some NHS trusts in England have sought to alleviate the issues by allowing employees to either reduce the amount they contribute to their pension each year or stop paying into it altogether while continuing to receive their employer contribution as additional, taxable pay. There is currently no means of doing this in Scotland, with doctors having to choose between staying in the scheme and potentially breaching the thresholds or leaving it and losing the significant benefit of the employer contribution. The BMA is lobbying the Scottish Government to look at introducing similar measures north of the Border.
A spokesman for the government said: “We are working with stakeholders, including the BMA, to gather evidence on any impacts of the UK Government’s pensions and taxation rules. We are also developing an awareness-raising campaign with the SPPA.”
Meanwhile, East Renfrewshire MP Paul Masterton, who was a pensions lawyer at international law firm Pinsent Masons before entering parliament in 2017, has tabled a debate on the matter to be held in Westminster on Tuesday.
“It cannot be right that the pensions system is operating to disincentivise much-needed NHS consultants from taking on additional hours,” he said.
“At a time when there are real resource gaps in the NHS right across the United Kingdom, with over seven per cent of consultant posts in Scotland still vacant, we cannot have a situation where experienced practitioners are turning away extra shifts because it’s landing them with five-figure tax penalties.
“Whether the answer lies in adding flexibility to strict NHS pay and pension terms, or with the Treasury using this as a reason to take a fresh look at the ridiculously complicated system of reliefs and allowances, this is an unintended consequence of the UK’s complex pension regime which we need to sort out quickly to let these consultants get back to work.”
HOW THE ALLOWANCES WORK
For every pound put into a pension, savers receive tax relief at their marginal rate, meaning higher-rate taxpayers in Scotland only have to pay £59 to save £100 while additional-rate taxpayers only have to pay £54.
To limit the overall cost to the Treasury an annual savings limit of £40,000 was introduced in 2006 and, because the reliefs favour the wealthy, a taper was introduced in 2016. This can see the annual allowance reduce from £40,000 to £10,000 for anyone earning over £110,000.
When it comes to final salary schemes like the NHS pension, however, it is not just the amount added in that year that is counted, but rather the change in the value of the overall pension pot. The complicated formula for calculating that involves multiplying the actual contributions made by 16, making it easy to breach the limits.
The rules governing the NHS pension mean employees cannot reduce the proportion of salary they contribute. If they withdraw from the pension altogether they will lose their employer’s contribution as there is currently no means for that to be paid as salary instead.
On top of the annual allowance, there is a lifetime allowance that limits the total amount that can be saved into a pension before higher tax charges are incurred at retirement.
Also introduced in 2006, the lifetime allowance was initially set at £1.5 million before rising to a high of £1.8m between 2010 and 2012. It is currently set at £1.03m and will rise to £1.055m in the new tax year.
A final-salary pension valued at £1m would give an annual pension in the region of £50,000 to £60,000.
HOW IT IMPACTS: ONE CONSULTANT’S STORY
I have been an NHS consultant for 14 years at the Queen Elizabeth University Hospital. I am employed on a 40 hour per week full-time contract and in addition I agree to provide eight hours per week of additional clinical work, making 48 hours in total. I do not do any private practice outside the NHS.
I have a well-paid job and am happy to pay income tax at 40 to 46 per cent. In the last two years, however, I have been subject to the new rules on tapered annual allowances which has resulted in unexpected tax bills totalling nearly £17,000 in my case.
In 2016-17 my additional tax bill was just under £15,000. In the following year, despite my salary being almost identical, the additional bill was around £2,000. It is extremely difficult for anyone who is not an expert to do the calculation with any confidence, so like many of my colleagues I will be waiting nervously for a letter from the pension agency to find out whether or not I have another big bill for this year.
My only means of avoiding these charges is to reduce my income below the various thresholds, and the only way I can do this is to reduce the amount of work I do for the NHS. I have no desire to do this and indeed would happily volunteer to do extra work occasionally at weekends to tackle waiting lists or fill gaps in the service. The tax implications make this impossible for me and I have stopped doing any extra work already.
I am sure that the Treasury did not intend these changes to the NHS pension scheme to force experienced, committed consultants to do less work for the NHS, but this is the reality being faced within my own hospital.
The other factor is that doctors at my stage of their careers are now reluctant to take on other paid work such as leadership and management roles, depriving health boards of a whole tranche of experienced consultants who might otherwise be providing the clinical leadership that the NHS is looking for.