highly paid members of the NHS Pension Scheme (65)
Roderick Ramage, solicitor, www.law-office.co.uk
published by distribution to professional contacts 4 November 2019)
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does
not accept any responsibility for anything that any person does or does not do
as a result of reading it.
law of unintended consequences
the Guardian shouted “NHS consultants turning down work to avoid huge pension
tax” (24 June 2019). All the press ran
the same story. On 9 July 2019 one Rachel Clarke wrote this in that paper.
Everyone loves to hate a fat cat. And so, in 2016, when former chancellor
George Osborne decided to reduce pension tax relief for very high earners, he
must have thought he was on to a sure thing. After all, with a UK average household income
of only £26,000, who would ever complain about the fate of people so indecently
well paid they could afford to set aside up to £40,000 a year in pension
Three years on, Osborne’s slam-dunk strategy for bolstering the exchequer’s
coffers is wreaking havoc on the NHS. Something
as arcane and tedious as pension tax law is threatening to increase waiting
lists, lengthen delays in starting cancer treatment and endanger the lives of
Finance Act (No 2) 2015, s23 and schedule 4 were not, of course, aimed at the
NHS’s highly paid medical staff, but apply to all highly paid members of all
registered pension schemes, whether in the public or private sector, whether
defined benefits (eg final or career average salary) or defined contribution
(money purchase). The impact on NHS (mainly
consultants and GPs) was caused not from the change in the law alone, but from
a combination of, on the one hand, the rigidity of the NHS’s employment terms
and its pension scheme rules and, on the other, the flexibility of working hours
and commitment enjoyed by the NHS’s senior medical staff.
Finance Act 2004 reformed pension scheme taxation from 6 April 2006. Members and employers enjoy tax relief on
contributions up to the member’s annual allowance (“AA”), which is the amount
of the member’s taxable pay capped at £40k pa. Initially the cap on the annual allowance was
£215k (and by 2010/11 had risen to £255,000), but the Government policy has since
been to reduce the tax reliefs available to highly paid persons, most recently
by the Finance (No 2) Act 2015, which inserted s228ZA and s228ZB into the FA
6 April 2016 for every £2 of income (whether pensionable or not) over £150k pa,
£1 of the taxpayer’s AA is lost up to a maximum of £30k, so anyone earning over
£210k pa has an annual allowance of £10k.
This is called tapered AA.
If the contributions paid by and for a
member exceed his AA, he (or she,
but I keep to “he” etc for short) is chargeable with
a tax called the AA charge. The
calculation is relatively straightforward in the case of DC scheme, because the chargeable amount is
the amount of the contributions in the tax year. It is complicated in the case of a DB scheme,
because the chargeable amount is reached by a formula, which takes account of the
increase in the calculated value of a members DB (final or average salary)
pension over the year, and so the increase and not the contributions actually paid
is the chargeable amount. The problem
for a DB member is that the value of his pension can be increased merely by the
additional year of pensionable service, and is likely to be increased more
substantially by any salary increase or bonus or both paid in the year.
the carry-forward of previously unused annual allowances has mitigated the
annual allowance charge, but now any such relief is likely to have been exhausted.
The short term impact of this tax can be mitigated by the “scheme
pays facility”. Sections 237A to 237E of
the FA 2004 enable a member with this liability to require the scheme to
discharge this tax and reduce the member’s benefits accordingly.
NHS and consultation
NHS Pension Scheme is a registered defined benefits scheme with different types
of final and career average salary pensions in different sections. Lump sums, ill-health pensions and pension
benefits for dependants are provided in all sections. Membership is automatic for eligible persons. Members may opt out, but, if they do, they
lose both ill-health benefits and dependant’s benefits on death in service.
the words of the Department of Health & Social Care (“DHSC”), “senior
clinicians, particularly consultants and GPs, have a unique degree of
flexibility over their workloads and can vary their commitments. Consultants
can reduce or increase the number of additional sessions undertaken, and many
GPs are self-employed. This can create perverse incentives for clinicians to
seek to control their income and pension growth by limiting or even reducing
their NHS work to avoid breaching their annual allowance.”
consequent serious disruption to the provision of NHS services has prompted the
DHSC to negotiate with the medical profession to introduce some flexibility
into the NHSPS with the intention of enabling members to
control their accrual of pension and contributions order not to exceed the AA
and to aim for the maximum lifetime allowance (“LTA”) (£1,055,000 in 2019/20)
to be reached at a time which matches their target retirement dates. Its first proposal, a 50:50 option by which members
could reduce their pension contributions and pensions accrual by 50%, was found
to produce insufficient flexibility, which led to a new consultation paper (11
September 2019), suggesting a two stage process to control pension accrual and
First Before start of each scheme year, the member can
choose an accrual and contribution rate as percentages of the standard rates,
in multiples of 10%.
Secondly Towards the end of the year, when the member
will have a good idea of his total earnings, he will be able to update the
accrual and contribution rates with retrospective effect to match the optimal
accrual and contribution rate for the year.
may pay unused employer contributions to the members as salary, but in a lump
sum at the end of the year.
the proposals should help to alleviate the problem, they might not be
sufficient. The DHSC “has form” for its
unwillingness or inability to adapt the NHS Pension Scheme to changing
circumstances: see, as an example, my article at www.law-office.co.uk/art_24-hour_retirement.pdf
about its bureaucratic and arguably unlawful 24-hour retirement
arrangements. I end with three possible weakness
in the DHSC’s present proposals, and doubtless other will find many more.
DHSC in its consultation paper rejects the suggestion of a zero accrual option
for members, who have reached their LTA and do not wish to accrue any more
pension rights, but wish to remain in the scheme for ill-health and death in
service benefits. It says “Without
pension accrual taking place, it would be inappropriate for tax-relieved
contributions to purchase insurance products.”
It is commonplace in the private sector to provide insured benefits in either
stand-alone insurance schemes or in insurance only sections of occupational
not directly related to the tapered AA, it is relevant to the wider tax issues to
suggest that responsible employers (including the NHS) should not provide death
in service lump sum benefits for dependants out of a registered pension scheme,
where the amount is likely to cause the LTA of highly paid staff to be
breached: see www.law-office.co.uk/art_lifetime_allowance_risks_2016.pdf.
for members, but not surprisingly, the DHSC appears to have made no proposals
to compensate members, who have already incurred tax liabilities as a result of
its failure to have acted earlier to introduce the kind of flexibilities only
now being proposed.
copyright Roderick Ramage
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