The Government has announced that it will be ‘paying the tax bills’ of doctors who are at risk of incurring large pension tax charges due to breaching pension contribution limits.
Breaking the convention of not making official announcements during an election campaign, the Government made the emergency announcement last night in a bid to prevent shifts from being left unfilled this winter due to a fear of large tax bills.
Under the plans, the tax bills incurred by doctors this year will be covered by the NHS pension scheme under the ‘scheme pays’ process. Whereas this would normally result in a reduced pension at retirement, the Government has pledged to ‘make good’ any reduced pension.
This tapering effect means someone with income of £210,000 is left with an annual allowance of just £10,000, a 75% reduction on the standard £40,000 annual allowance.
Jon Greer, head of retirement policy at Quilter, commented: “It would be a radical move by the government to pay the pension tax bills of NHS workers. It is an effective admission that the pension annual allowance taper is a broken policy that is too unpredictable and punitive, however it has taken the country to be on the cusp of a winter crisis in the NHS during an election for the government to address it.
“This would be a controversial policy given it offers NHS staff special treatment and ignores large swathes of high earning public sector workers who provide critical services everyday such as judges, teachers and transport workers.
“This quick fix to avert a crisis is the only option open to the government right now. Over the longer term the government should go much further – the noble thing to do would be to accept the taper is not fit for purpose and reverse it.”
Steve Webb, director of Policy at Royal London and former pensions minister, added: “The plan for the NHS to pay the tax bills of doctors amounts to a bizarre money-go-round with one part of the public sector paying money to another in order to resolve a short-term crisis.
“The fundamental problem here is the complex system of pension tax relief. The failure of the government to address this issue has resulted in emergency measures having to be taken in the middle of an election campaign simply to avoid a Winter crisis in the NHS. The Treasury could have avoided all of these problems if it had simply admitted months ago that the pension tax relief system is too complex and had abolished the tapered annual allowance altogether.”