Last week NHS England published a plan under which doctors could pay their 2019/20 annual allowance tax charges out of their pension fund. The UK Health Minister has since warned that these plans may constitute ‘tax avoidance’.
How have the charges arisen?
The annual allowance for pension contributions is currently £40,000 per annum. Taxpayers who have adjusted net income over £150,000 will see their annual allowance tapered by £1 for every £2 over the threshold. Anyone exceeding their annual allowance will face a tax charge at the end of the year.
Tapering of the annual allowance has been highly criticised due to it penalising those in defined benefit schemes. The increase in value of the fund counts towards the annual allowance and therefore, opens the scope of those who may face a tax charge.
The Current Position and New Proposal
As a result of potential annual allowance charges, NHS doctors have been turning down extra shifts and overtime to avoid breaking the £150,000 threshold. This has resulted in a shortage of staff to cover shifts, impacting the efficiency of some NHS services.
The NHS pension scheme agreed pay the annual allowance charge for 2019/20 out of the individual’s pension pot. They hope that this will combat some of the shortages in the NHS and encourage doctors to do extra shifts.
Referred to as “scheme pays”, it usually means that the individual would lose some of their total pension savings as a consequence. The NHS however, is also promising to top up the individual’s pension pot when they retire, so that they will not lose out by working extra hours this winter.
The Flaws
NHS staff have been given an immediate short-term solution, it does not however address the tapering of the annual allowance in future years. Individuals may even face a tax charge in the year they retire when their pension is topped up. Due to the upcoming election, the government has not offered any solutions for the next tax year.
The plans also came under criticism from Matthew Hancock, Secretary of State for Health and Social Care. Whilst he agreed that the ‘scheme pays’ proposal was ‘operationally necessary’ to avoid winter staff shortages, he stated that it is an example of tax planning. He warned the details should be designed to minimise the risk that the process can be viewed as tax avoidance, which is incompatible with tax rules for public bodies.
Critics are calling for the tapering provisions to be scrapped. There is likely to be backlash from other high level earners, who have not been given the same opportunity to avoid a tax charge.
