NHS Pension Scheme: Tapered Annual Allowance

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.

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?

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.

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?

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.

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.

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.

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.

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.

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.

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.

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?

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?

It is a pleasure to serve under your chairmanship, Sir Roger. I thank my hon. Friend the Member for East Renfrewshire (Paul Masterton) for securing the debate; he made a characteristically thoughtful contribution.

We are the custodians of taxpayers’ money and need to manage the country’s finances in a way that gives value for money and allows us to live within our means. We also need to accept that when we make changes to the tax system, it changes people’s behaviour. I am grateful for the opportunity to look at these issues through the prism of the impact on the workforce in the national health service.

As my hon. Friend said, the annual allowance is a fiscal measure that operates across all pension schemes in both the public and private sectors. Alongside the lifetime allowance, the Government keep this measure under review to ensure that the benefit of tax relief on pension scheme contributions remains affordable. It is in fact one of the most expensive tax reliefs in the personal tax system. In 2015-16, income tax relief and employer national insurance contributions relief cost the Exchequer around £50 billion, with around two thirds going to higher-rate taxpayers. That is an important point to bear in mind, because we need to ensure that our tax system is progressive and managed efficiently. We will want to look at tax reliefs that favour the highest-rate taxpayers to ensure that our overall burden of tax is appropriate.

The reforms made to the lifetime and annual allowances in the previous two Parliaments are expected to save over £6 billion a year, and are necessary to deliver a fair system and to protect public finances. To ensure that the benefit the wealthiest pension savers receive is not disproportionate to that of other pension savers, the Government restrict the amount of tax relief available. The annual allowance does not taper below £10,000, and fewer than 1% of pension savers will have to reduce their saving or face an annual allowance charge because of this policy.

Does the Minister agree that a potential issue is that this acts as a cap on the amount of tax relief that is given out? We know that this is not progressive in terms of higher-rate tax relief on pensions. Would it not be better for us to look at a system in which we have a flat rate of 25p, 28p or 30p in the pound, rather than the higher rate? That would mitigate, or mean that we did not need, those lifetime and annual allowances?

I shall not stray into policy that is not mine and that belongs to Her Majesty’s Treasury—that is a very convenient way for me to duck the issue. It comes back to the point that the moment we start to introduce complexity into our tax and allowance system, it brings perverse incentives. The overall goal in recent years has been to bring our public finances back into kilter, having had excessive deficits. It is only natural that the Exchequer looks at where reliefs that are funded by the state are going to higher-rate taxpayers. That is where we have got to with regard to the impact on public sector pension schemes, which by their nature are as we describe.

The NHS pension scheme is a generous and valuable part of staff reward packages, and is one of the best schemes available, notwithstanding the issues raised by my hon. Friend the Member for East Renfrewshire. It is right and proper for all hard-working NHS staff to expect financial security in retirement after dedicating a lifelong career to looking after the nation’s health.

For some senior clinicians, the generosity of the scheme, combined with their comparatively high levels of pay, means that their pensions build up to a level that breaches tax limits. Both the annual and lifetime allowances encourage pension growth at a steadier rate that is more aligned with typical pension growth experienced across the general population. To illustrate that, under the 1995 section of the NHS pension scheme, members who accumulate pension benefits worth near the £1 million lifetime allowance will have built up a pension of around £46,000 a year, plus a tax-free lump sum of £138,000 on retirement. Pensions of that size provide substantial financial security in retirement, and it is right that the Government take steps to limit the tax incentive to save further.

My hon. Friend raised concerns about the impact on our NHS workforce. With respect to discussions between the Treasury and the Department on the introduction of the allowance, the 2015 manifesto committed to

“reducing the tax relief on pension contributions for people earning more than £150,000.”

That was a manifesto commitment we had to deliver. The tapered annual allowance fulfils that commitment and applies to all contributors to pensions, in both the public and private sectors. The impacts of the change, including on the public sector, were carefully considered at the time.

My hon. Friend asked about the number of doctors and dentists taking early retirement. Data from the NHS pension scheme administrator shows that 494, 490 and 424 hospital doctors took voluntary early retirement in the financial years ending 2016, 2017 and 2018 respectively. Those early retirements represented approximately a third of all hospital doctor retirements in those years. With respect to GPs, in 2016, 695 took early retirement; in 2017, 721 took early retirement; and in 2018, 588 took early retirement. Those figures represented more than half of all GP retirements in those financial years. With respect to dentists, 145 retired early in 2016, followed by 143 and 115 in 2017 and 2018 respectively. Those retirements represented approximately 40% of dental practitioner retirements in those years. There is clearly an impact on the behaviour of practitioners.

I am grateful to the Minister for giving way. She is highlighting some of the concerns that have been expressed about the unintended consequence of a capacity problem for the NHS as a result of the changes to pension relief. Given that health is a devolved issue in Wales, have the British Government received any communication from the Welsh Government expressing concern about the changes?

I have not, but this is about the impact of the pension and tax regime on the sector. I am not aware of any conversations with the Treasury, but if the hon. Gentleman has concerns, I encourage him to make representations. There are always unintended consequences with any policy, and we always need to challenge the operation of our policies to make sure they are in the right place and to decide whether they need to be refined, tweaked or changed in any way.

The Government recognise that pension tax considerations will contribute to decisions by some senior clinicians to retire early or to reduce their NHS commitments. For those who wish to remain in the NHS pension scheme, the annual allowance is a disincentive to take on additional work and responsibilities —that is very clear. The extra income increases the impact of the tapered annual allowance.

Some clinicians may judge that a reduction in their current NHS commitments, while maintaining scheme membership, better serves their financial interests. Employers tell us that the reduction in service capacity can be difficult and that capacity is expensive to replace. I assure my hon. Friend that the Government are listening carefully to the concerns raised by senior doctors and NHS employers about the impact of the tapered annual allowance.

That doctors may seek to limit or reduce their NHS commitments is of concern to Ministers, and something on which we are keeping a close eye. Maximising the participation of our clinical workforce is clearly essential to the delivery of our ambitions for the NHS. The quality and quantity of our workforce is always an important factor in the extent of the delivery of our objectives.

As an immediate step, the Department has sought to make available to NHS pension scheme members all possible flexibility under Her Majesty’s Revenue and Customs legislation and the current fiscal framework for public sector pension schemes. The BMA asked that we extend the scope of the voluntary “scheme pays” facility—implemented by the NHS pension scheme—to cover the payment of tax charges from breaches of the tapered annual allowance.

We have done that, but we have also gone further. The NHS pension scheme’s voluntary “scheme pays” facility has also been extended to cover tax charges of less than £2,000, which means that, from tax year 2017-18, a member can elect for the scheme to pay 100% of their annual allowance charge to HMRC on their behalf. The “scheme pays” facility allows individuals to settle their tax charge without needing to find funds up front, but HMRC requires an adjustment to the benefits accrued by members if a defined benefit pension scheme pays an annual allowance charge. That adjustment must be just and reasonable, and with regard to normal actuarial practice.