Hospital Doctors and the pensions trap

Dr John West surveys the headlines on the impossible situation facing many hospital doctors due to pensions taxation – and explains why HCSA is calling for Treasury action

Hospital doctors’ pensions have hit the headlines since the start of the year with a growing body of evidence underlining the damaging impact on care of the current tax regime.

Suddenly, hospital doctors, senior nurses and NHS managers are finding they face a big financial issue over the withdrawal of tax relief on their pension contributions.

It is impacting on the health service because the extra taxation charges act as a deterrent to taking on more work for fear of falling into a pension trap – becoming entangled in the complex web of thresholds and tapering that accompany the annual allowance and which make work effectively unpaid or even loss-making.

HCSA has described this as Russian roulette, and it is delivery of effective patient care and the NHS who are the ultimate victims.

The Association has received a constant stream of reports from aggrieved members who have received unexpected hefty tax bills, often triggered by additional management duties or having worked extra shifts to help hospitals meet patient care needs.

This situation is clearly unsustainable – in terms of the choices which hospital doctors are being forced to make about work in a strained NHS system, and in terms of the knock-on impact on patient care.

Although HCSA as a doctors’ trade union is unable to give individual financial advice, that does not stop us from taking a firm position on the current situation facing our members.

Key problem areas include:

  • The “cliff edge” of the £110,000 “threshold income,” which is seeing doctors facing unexpected bills after, for instance, taking on extra non-pensionable shifts to assist employers
  • The similar perverse impact of a normal annual incremental pay step, taking a promotion, career progression, working more PAs or additional responsibilities
  • The way additional pensionable pay within a tax year impacts on the calculation of a hospital doctors’ “pension input amount”, which can trigger sizeable tax bills for breaching annual allowances
  • The difficulty of predicting a breach of any thresholds until after the event: leading many hospital doctors to adopt an extra cautious approach to agreeing to additional shifts
  • The pension lifetime allowance ceiling, which among other factors is causing some more experienced hospital doctors, and senior NHS managers, to consider the exit.

All of this has created a rapidly unfolding crisis which, while NHS Employers, politicians, and member organisations are raising the alarm, the Treasury seems content to allow unabated.

One limited measure has been taken to alleviate the problem of surprise tax bills, most notably the extension of “scheme pays,” whereby, if asked, the NHS Pension scheme will pay the costs, with an interest charge, of tax bills triggered across the three schemes – 1995, 2008 and 2015.

To date, this is the sole move on the issue, but many doctors are reluctant to take it up – perhaps because the interest on “scheme pays” appears high and will reduce a doctors’ eventual pension. Certainly the advice of an independent expert in NHS pensions is required to assess whether it would be the best path.

In the political arena HCSA is pressing the Treasury Select Committee to mount an investigation into the disastrous impact of the taper for NHS doctors. We are also engaging with a range of parliamentarians, including providing briefings for a recent Westminster Hall debate secured by Paul Masterton MP, and individual journalists, to ensure that the issue is highlighted in Westminster, and uncover the depths of the problems the NHS pension trap is causing.

The bottom line is that there is currently a culture of fear within the profession and a dearth of information for worried doctors. And ultimately it is patient care that suffers.

Some doctors have taken the matter into their own hands by pulling out of the NHS scheme, changing their working patterns or exiting the profession altogether. Withdrawal from the scheme has its own risks: not least the removal of partner pension rights and the life assurance and death-in-service benefits.

To avoid this some doctors are dipping in and out of the NHS Pension scheme in what has been termed the “hokey cokey”.

In places medical staff have negotiated individual deals with Trusts by which they are paid in lieu of pension contributions – again a step which should not be sought without expert personalised advice.

All in, the situation is nothing short of chaos.

Ultimately, the root cause is the Treasury’s tortuous method of reducing tax relief for high earners. While it is unlikely that it will loosen its grip on the value of this tax pot, a growing alliance, of which HCSA is part, is arguing for reform, in the first instance the abolition of the taper. This would strip out one element of the current pensions trap.

Other public-sector pension schemes have adopted different mechanisms which, if adopted for hospital doctors, would return a modicum of individual choice.

Members of the Universities Superannuation Scheme, for instance, are allowed to specify the earnings they wish to see pensionable – with no impact on lump sum death benefits. Such a mechanism would be beneficial to many doctors in removing the tax “cliff edge”.

There is also a strong case for a better service and swifter information from NHS Pensions, and urgency from Trusts, to provide the information required to supply pension value statements in good time.

At the end of the day, given its reliance on hospital doctors working extra shifts to paper over the vacancy gaps, it makes no sense for the NHS to maintain a system which effectively incentivises reductions in workload – a fact not lost on NHS Employers and the Department of Health and Social Care.

That is why pressure for change needs to continue on every front to ensure the government acts to end this perverse system, but also that it does not replace the current regime with something equally as bad – or worse.

Pension pointers

Do I need to worry?
You may be affected by the taper if your “threshold income” in a given tax year is more than £110,000.

You will not be affected by the taper at all if it is less then £110,000.

But, even if you are unaffected by the taper, if your pensionable earnings have increased or you have bought additional years for your pension, this may in turn increase the “pension input amount” used to calculate your annual allowance liabilities. This could leave you facing a tax bill if the value between the start and end of the year across your pension schemes has risen by more than £40,000.

What is ‘threshold income’?
To establish it, you need to work out your “net income” – your taxable income from all sources less certain tax reliefs (not Gift Aid, however).

What is ‘adjusted income’?
For NHS hospital doctors, this is where complications really start, and the advice of an NHS Pension specialist may be required.

If you breach the £110,000 “threshold income”, the “adjusted income” is used to determine whether your annual allowance will be tapered.

It is calculated by totalling your “net income” (see above), the pensions input amount (the “paper” growth of your pension schemes over the year), and a few other elements.

One complication hospital doctors will face is calculating their pension input amount, which is not the amount paid in as shown on your payslip.

It is based on the paper growth, which for the NHS Pension scheme is via a formula linked to your pensionable salary.

An extra pay point or promotion, for instance, can result in surprisingly large growth – pushing “adjusted income” over the £150,000 threshold for the tax taper.

Will I definitely face a tax charge if my pensions input amount exceeds my tax free allowance?

No – because you may have unused allowances from previous years that you can offset against this year’s excess. That’s why it is essential to seek specialist independent pensions advice.

What do I do if I think I have exceeded my tax allowance?
NHS Pensions makes clear that it is the scheme member’s responsibility to establish and calculate any annual allowance charge, and to tell HMRC about it in your tax return.

Will NHS Pensions tell me if they think I’ve breached the annual allowance limit?
They will send a pensions savings statement if they calculate that a scheme member’s “pension input amount” breaches the standard £40,000 annual allowance (if your allowance is tapered then you may not receive an automatic statement at all). They say this will be dispatched by 6th October following the relevant tax year provided the necessary information has been received from employers by 6th July. If it is not, then they say a pensions savings statement will be dispatched three months after receipt of the necessary information. If you have other retirement savings this will of course not provide a full picture.

Is there a deadline for electing for ‘scheme pays’?

Yes, 31st July following the tax year in question - for example July 2019 for the 2017-18 tax year.