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Pensions:   Reform the broken tax system

We're calling for

  • Annual Allowance to be abolished in Defined Benefit pension schemes
  • A rise in the Lifetime Allowance to a realistic level and in future it must be linked to inflation
  • Pension contribution recycling must be made available to all affected NHS employees

Pensions tax is broken. The NHS scheme punishes the highest payers and leaves senior doctors with little choice but to leave the pension scheme, leave the NHS altogether, or to retire early. The system is unnecessarily complicated - precious time is spent filling in paperwork and seeking expensive individualised advice.

Reforming the scheme to retain higher payers will benefit everyone with an NHS pension. And crucially, it will help to retain experienced doctors within the NHS at a time when they are needed more than ever.

'A national scandal'

The Health and Social Care Committee recently concluded that “it is a national scandal that senior doctors are being forced to reduce their working contribution to the NHS or to leave it entirely because of NHS pension arrangements.”

HCSA’s survey data has revealed that one in 12 senior doctors want to work fewer hours for pensions taxation reasons. One in 16 had already made definite plans to leave the service due to pensions tax. NHS workforce data shows retirements have grown in 2022, with 20 percent more doctors retiring in 2021-2 compared to a year earlier – and this is set to worsen.

Why Annual Allowance on doctors' pensions is still an issue and must go

The Annual Allowance (AA) is a yearly limit on tax-free saving within a pension. The standard AA is currently £40,000 but this is tapered down to £4,000 for the highest earners. In a Defined Benefit (DB) pension scheme such as the NHS, AA is applied to growth in pensionable benefits rather than the amount which is contributed.

This is complicated and difficult to predict. Many colleagues have been caught out by surprise tax bills over the last few years, with some quite literally paying to go to work. HCSA pushed hard to “scrap the taper” and as a result of widespread lobbying, the government raised the taper threshold by £90,000 in 2020.

Though this improved the situation at the time, the pension tax problem has NOT been solved.

Many senior healthcare staff are now breaching the standard annual allowance just by working full-time - the only options to reduce growth are to go part-time or to opt out of the scheme temporarily (hokey-cokey).

Unexpected and unfair tax charges cannot go on. Even government advisors the Office of Tax Simplification recognised this, suggesting that AA could be removed from DB pensions as the Lifetime Allowance already limits tax relief.

HCSA is calling for Annual Allowance to be scrapped in DB schemes.

The Lifetime Allowance freeze - out of step and driving doctors to retire

Lifetime Allowance (LTA) is the total amount an individual can pay into a pension before retirement without incurring tax charges. If, at retirement, you have surpassed the LTA, you will pay 25 percent on the excess amount as income, or 55 percent if withdrawn as a lump sum.

Ten years ago the LTA stood at £1.8 million but this has reduced dramatically over time, and has recently been frozen at £1.073m until April 2026. With current record levels of inflation, LTA is massively out of step with the economy.

Doctors are getting a raw deal and are being incentivised to retire early. We are calling for the LTA to be increased to a realistic level and to be linked with inflation.

The quick term fixes we need NOW

Whilst we lobby for system reform, there are short-term quick fixes that must be taken immediately to prevent an exodus of senior doctors:

1. Employers must follow guidance and make provision for recycling of employer contributions.  Ideally this should be mandated at a national level.

2. Tax-free financial advice should be made available for NHS employees – up to £500/year is already allowable under HMRC rules, but, as with pension recycling, the availability is a postcode lottery.