NHS Pension Scheme: Tapered Annual Allowance

Paul Masterton Excerpts

Tuesday 2nd April 2019 Westminster Hall

[Paul Masterton (East Renfrewshire) (Con)]

I beg to move,

That this House has considered the effect of the tapered annual allowance on NHS pension scheme members.

I have been aware of this issue for some time, as a local MP and as a former pensions law practitioner. Primarily through the work of the journalist Josephine Cumbo at the Financial Times, it has come to light that it is significantly more widespread and has much more serious implications for the NHS than I had originally understood.

I do not want to take up too much time on what the annual allowance taper is and how it works, partly because it is boring and incredibly complex, but a small amount of background is needed before explaining why it is an issue in the NHS and the consequences that seem to be flowing from it.

The tapered annual allowance was introduced from 6 April 2016. In short, it meant that from the 2016-17 tax year, a reduced annual allowance may apply to all pension savings by or on behalf of a member, depending on the level of taxable income within the tax year. It applies to individuals with a threshold income of more than £110,000 and an adjusted income of more than £150,000. For every £2 that an individual’s adjusted income goes over £150,000, their annual allowance for that year reduces by £1. The minimum reduced annual allowance someone can have is £10,000.

It will not be a surprise that the calculations of threshold and adjusted incomes are not simple in the least. They are massively confusing and make it very difficult to predict what tax bill will be incurred. As it cuts the annual allowance for the current year, an individual has no idea how much pension saving they can make.

[Jim Shannon (Strangford) (DUP)]

The Financial Times reported that some doctors, GPs and dentists will receive a potential tax bill of £80,000. Does the hon. Gentleman agree that we and this Government have a duty to ensure that NHS staff have all the information so that no one faces unexpected tax bills?

[Paul Masterton]

The hon. Gentleman is absolutely right. One of the key issues is that because it reduces the tax allowance in the current year of work, it is impossible to work out what the annual allowance will reduce to, and people cannot plan. I will go on to raise some examples from my own constituents, as I am sure other hon. Members will want to do.

[Andrea Jenkyns (Morley and Outwood) (Con)]

A constituent told me that he has been advised to take early retirement to avoid taxes. Does my hon. Friend agree that retaining long-serving consultants with experience in their fields is vital to the NHS’s success?

[Paul Masterton]

My hon. Friend is absolutely right, and that is why the issue is so important. I appreciate that we are talking about people who earn a lot of money and who have good pension schemes, but there is a serious potential knock-on effect of very senior doctors turning down hours or taking early retirement.

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

I received an email from a consultant who works in my constituency, informing me that one of the unintended consequences of the new arrangement is that he has reduced the number of hours he works in the NHS.

[Paul Masterton]

That is exactly right. I asked for a Treasury Minister to reply to this debate, because the underlying legislation is a Treasury issue, but it is important to have a Health Minister here today to hear at first hand the stories that are being raised by MPs.

In recent months, it has become increasingly apparent that the pension tax rules are resulting in unexpected tax charges being levied on a large number of GPs, senior doctors, surgeons and consultants right across the UK. I believe that if the issue is not addressed, serious capacity gaps in the NHS will only be made worse.

In Scotland, 7.6% of consultant posts are vacant, and more than half of those have been vacant for more than six months. There is a similar picture in the NHS in all other parts of the United Kingdom. In a recent survey by the Hospital Consultants and Specialists Association, more than 40% of the doctors questioned said that pension taxation changes had led them to change their plans and retire earlier than expected.

The way in which the tapered annual allowance operates means a significantly reduced annual allowance ceiling is hitting many of the NHS professionals that I, and the hon. Member for Strangford (Jim Shannon), mentioned in their mid to late careers. As their entire income is taken into account for the purposes of tapering, the threshold can be breached even by doing non-pensionable work, including covering for absent colleagues, extra programmed activities or waiting list initiatives. NHS staff on pay-as-you-earn cannot avoid the notional pension input amount calculation. As a result, many consultants are being hit with unexpected five-figure tax charges. A number are now dropping extra work, turning down hours or going part-time to negate or avoid the penalties.

Of course high earners should pay their fair share, and all the doctors who have contacted me want to do so, but they are paying rates of more than 60% as a result of the taper. Some are paying effective rates of more than 100%. Many consultants who continue to do non-pensionable overtime are effectively paying the Government to go to work, while receiving no additional pension benefit.

[Mr Paul Sweeney (Glasgow North East) (Lab/Co-op)]

The hon. Gentleman is making a powerful, forensic speech on this critical issue facing the national health service. Several of my constituents have been in touch about it. One consultant mentioned that the impact of this issue on NHS Greater Glasgow and Clyde will be huge, because waiting list initiatives ensure that the health board does not receive penalties, so it militates against efficiency in the national health service and will cost more in the long run. It is a total false economy. Surely the Minister can take action with the Treasury to get this sorted out quickly.

[Paul Masterton]

The hon. Gentleman raises a good point. Our constituencies share a health board. The examples of people who work for NHS Greater Glasgow and Clyde show exactly the consequences and knock-on effects.

One surgeon contacted me to tell me that he was hit with a tax bill of £62,000 because he received a national award. People who receive a bonus or a pay rise can find themselves with a whopping tax penalty as a consequence. Rigid pay and pension rules in the NHS mean that their ability to mitigate the issue is pretty much non-existent, certainly compared with people in the private sector, because there is not the flexibility to reduce contributions or request cash in lieu of pension if there is a danger of breaching the allowance. The only option, as we have heard in Members’ examples, is to opt out of the scheme altogether or drastically reduce working hours. This issue is becoming a huge driver not only of early retirement, which in itself is extremely serious, but of enforced reduced working hours. That is having an impact on NHS care and creating lost capacity. Waiting times, which are a problem in various areas across the UK, are hit because these perverse rules mean that consultants refuse the overtime that is needed to help clear the backlog.

The investigation by the Financial Times found that the issue had increased the risk of delays in cancer diagnosis in some parts of the UK and lengthened waiting times for procedures such as hip replacements. Critical areas such as intensive care and radiology are also being affected. One consultant said that about 50 fewer patients were being seen per week in the cancer clinics they cover, as a result of doctors turning down extra shifts.

A consultant who lives in my constituency contacted me following receipt of a tax charge of £29,000, despite doing no work outside the NHS. He told me that he will now have to drop a session of clinical work to try to ensure that it does not happen again, and that he is actively considering early retirement, having reluctantly started to reach the conclusion that there is no incentive for him to continue his career beyond the age of 60. He has been forced into that position by the clear unintended consequences of the pension system.

[David Linden (Glasgow East) (SNP)]

I congratulate the hon. Gentleman on securing this debate; the interest today shows that there is probably support for a Back-Bench business debate. He is absolutely right to highlight the huge financial penalties that people are incurring. One of my constituents in Barrachnie is looking at a £15,000 bill, which he got at the end of January. That is not helpful. He has already told me that he is planning to retire early. Surely these examples only make the case to the Government that they need to take action.

[Paul Masterton]

I thank the hon. Gentleman for raising another specific case. I hope the Minister will bear in mind the added weight of evidence.

Another of my constituents, who has worked as an NHS constituent for 14 years at the Queen Elizabeth University Hospital in Glasgow told me that he is employed on a 40-hour per week full-time contract and provides eight hours per week of additional clinical work, making 48 hours in total. He does not do any private practice outside the NHS, but he was hit with an unexpected bill of nearly £17,000 as a result of the tapered annual allowance. The only way the consultant can avoid those charges is to reduce his income below the various thresholds, and the only way he can reduce his income is to reduce the amount of work he does for the NHS. He has told me that he has no desire to do that and would happily volunteer to do extra work occasionally at weekends to tackle waiting lists or fill gaps in the service, but the tax implications make that impossible and he has already stopped doing any extra work.

Another consultant from East Renfrewshire with 16 years’ experience—eight as a consultant—told me that he was actively declining extra work to support stretched services in order to avoid the tax penalties. That means that he does not apply for the discretionary points that are awarded for additional work that is taken on above the normal daily remit, such as developing new services, research and teaching. As the hon. Member for Glasgow North East (Mr Sweeney) said, that impacts not just on the daily running of services, but on the development of a culture of excellence within the NHS.

[Julian Knight (Solihull) (Con)]

I apologise for missing the first couple of minutes of the debate. My hon. Friend is a great thinker on pensions, which is the main reason I wanted to come here today, and I want to ask him a very simple question. Does he wish to dispense with the annual allowance and lifetime limit, or does he want a special dispensation for senior NHS workers, who are quite high-income earners?

[Paul Masterton]

I thank my hon. Friend for his kind comments, which are undeserved. There is a wider issue of the general complexity of the systems of reliefs and allowances in the UK pensions system. I hope not that there will be one single dispensation for one area of the public sector, but that we start to recognise that we need to look at the way the system is operating more generally and to work out whether some of the allowances and reliefs are actually necessary or effective, and whether they should be subject to a broader review.

A recent report showed that over 50% of respondents reported using the NHS “scheme pays” facility to pay off their unexpected tax charges. However, this does not work for all cases, and the amount is effectively treated as a loan that is then paid back from the retirement benefit, with interest charged against the pension at high rates. That means it is usually costlier than paying up front, particularly for younger members. I fear that this issue could see us sleepwalk into a deepening workforce crisis in the NHS and result in consultants leaving the NHS early, even though they still have the skills and experience we need. Those individuals are important not just for patients, but for junior doctors in terms of the training and mentoring they receive on the job.

The British Medical Association firmly believes that long-term changes to the pensions taxation system are required in order to remove the disincentives that exist, and I certainly agree. The Library’s excellent briefing on pensions taxation makes reference to the impact of changes in the annual allowance on the public sector, and notes that the 2017 report of the Doctors and Dentists Review Body requested more evidence about the impact of the annual and lifetime allowance on early departure rates. The Treasury indicated that it would consider revisions to the NHS pension scheme if there was evidence that the number of doctors and dentists taking early retirement as a result of its inflexibility was substantial.

I want to ask the Minister a series of questions, and I appreciate that she might not be able to cover them all today. A number of them fall within the remit of the Treasury, but hopefully she will be able to take those away and arrange for either herself or a Treasury Minister to get back to me. First, what discussions did the Treasury have with the Department of Health and Social Care when the tapered annual allowance was introduced, and was this ever flagged as a potential problem? Secondly, what evidence has the Treasury collected on the numbers of doctors and dentists taking early retirement, following the 2017 report? If the answer is none, why is that the case and when will analysis be carried out of the impact on changes to the lifetime and annual allowances on the NHS? If evidence has been collected, what were the findings of that analysis, and are any changes being considered?

Thirdly, what consideration has the Treasury given to a review of the annual allowance taper more generally, perhaps as part of a wider review into simplifying the incredibly complex system of reliefs and allowances in the UK pensions system? Finally, have the relevant Government Departments had any discussions with the relevant parties on whether permitting more individual flexibility in the NHS pension scheme could be a solution? That is something that NHS Employers is calling for. This issue is not specific to the NHS—I have heard in recent days from armed forces personnel—but it does appear to be an area with a particular problem.

Although I appreciate that many people will not hold great swathes of sympathy for individuals on such high earnings who will still receive high levels of retirement pension that most of our constituents can only dream of, the reality is that if this results in consultants with much-needed expertise turning down work or leaving the NHS altogether, it will have major implications for the provision of services and the quality of care our constituents receive right across the UK, whichever colour of Government is in control of their NHS.

I am sure that the Treasury did not intend these changes to force experienced and committed consultants, surgeons and GPs to do less work for the NHS, but this is the reality being faced in the hospitals that serve my constituents and the Minister’s. It is good that the British Medical Association and NHS Employers recognise that this is a serious concern and met last week to discuss it, but they have not agreed a solution or a joint action plan. In reality, the ball is in the Treasury’s court.

I absolutely respect and agree with the Government’s position that we need to get the balance right between encouraging saving and managing Government finances, but this issue cannot be easily ignored. Legitimate aims to restrict tax perks for the wealthiest in society are exposing ever increasing numbers of long-serving and highly experienced NHS workers to massive tax charges. If we want high quality care in the NHS in Scotland and across the UK, we need senior doctors who have devoted their professional lives to the care and wellbeing of our constituents. It is ludicrous for us to face a situation in which the pensions system is acting as a disincentive and effectively forcing consultants to choose between working for nothing and affecting patient care.

I hope that this debate provides the first opportunity for us to say clearly that, 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 tapered annual allowance, this is an unintended consequence of the UK’s complex pension regime, which we need to sort out quickly to let those consultants get back to work.