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Abolish “ludicrous” tapered annual allowance

13 May 2019

Royal London has called for the Treasury to abolish the tapered annual allowance for NHS pensions, as senior NHS staff continue to cut their hours or retire due to the fear of steep tax charges. 

In a new policy paper exploring problems within the NHS pension scheme, Royal London said the issue was likely to have a much bigger impact in the 2019/20 tax year than in previous years because the ability to carry forward unused annual allowances will now only go back to 2016/17 – the first year when the tapered annual allowance was in force.

The fear of triggering a huge tax bill has prompted doctors and senior NHS staff to consider their tax position before taking on additional shifts, in a move described as “utterly absurd” by Royal London.

Steve Webb, director of policy, Royal London, said: “The NHS is structured around senior clinicians taking on additional roles and responsibilities and this whole culture is being undermined by a bewildering system of pension tax relief. Rather than tinkering with the NHS pension scheme, the Treasury should abolish the ludicrous and capricious system of tapering annual allowances for tax relief.”

According to Royal London, the system of ‘tapering’ annual limits on contributions for those on higher incomes contains an unwelcome ‘cliff edge’ whereby a small increase in earnings can result in large tax bills.

The paper found that other schemes such as the Local Government Pension Scheme and the Universities Superannuation Scheme have been swifter to offer new flexibilities to members, with the former offering members a 50-50 arrangement where members can pay half contributions for half benefits. However, while this would reduce some of the problems faced by doctors, it would fail to completely overhaul the underlying issues.

Royal London said that rather than makes changes to the system or reform the tapered annual allowance, as mooted by the Chancellor, the only effective solution would be to abolish the tapered annual allowance altogether. The pension specialist added that if the Treasury did not want the overall cost of tax relief to increase, a simple across-the-board reduction in maximum limits on annual contributions could be introduced.