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RSM UK's James Gransby looks at the alternatives open to the government when fixing the NHS Pension Problem caused by the Tapered Annual Allowance for High-Income Individuals at FA 2004 s 228ZA, inserted by F(No2)A Sch 4.

The Conservatives pledged in their election manifesto that they would take measures to address the NHS pensions crisis. On 18 December they said that they would announce their solution on Budget day (11 March). What options might they be considering?

1. Scrapping the tapered annual allowance.
2. Removing the £110,000 'threshold income' cliff edge by increasing the figure, or removing threshold income from the calculations altogether.
3. Scrapping Annual Allowance tax charges in Defined Benefit schemes entirely as suggested by the Office for Tax Simplification (OTS).
4. Revisiting the 'pension input amount' multiple as applied to DB schemes.
5. Bringing in a mechanism to average out spikes in income over multiple tax years to avoid a sudden jump in pension input figures. Combined with allowing reduction in pension to produce a negative pension input to be carried forward for use in future years (currently restricted to £0 so negative growth is lost).
6. Extending the NHS clinician Annual Allowance tax compensation mechanism for the 2019/20 tax year into 2020/21, or making it permanent for the future.
7. Bringing in the proposed pension flexibilities allowing pension members to choose how much of their income to pension, in 10 per cent increments.
8. Allow a concession for NHS clinicians to forfeit tax relief on their pension contributions in exchange for not being assessed to Annual Allowance tax charges on their pension growth (as an echo of the now removed ESC A9 concession which used to apply to medics).
9. Do nothing.

Ultimately the Government will not want to turn off the tap to wider tax revenue whilst fixing the NHS pension problem.

Any changes made to the tapered annual allowance will decrease tax revenue, which was over £500 million in 2017/18, but would certainly go some way to solving the crisis. The £110k cliff edge issue is a particular problem as it can often lead to marginal tax rates of over 100 per cent due to the way that the calculations work. A word of caution though that whilst removing the £110k would prevent a cliff edge, it would draw more pension members into the tax net. Scrapping the taper altogether should be the only option considered when looking at this area.

The 16x multiple factor used to determine the 'pension input amount' to test against the Annual Allowance has not aged well. It should have been updated when the annual allowance fell from £50,000 as it no longer meets two of its stated objectives of 'deliver[ing] consistency between the treatment of defined benefit and defined contribution members' and 'avoid discouraging or encouraging defined pension provision unnecessarily'. If this factor were reduced to the previous 10x multiple which applied before 2010, then most NHS pension members would have their tax charges wiped out whilst still recognising that those with the largest growth should still incur a tax charge.

Purely looking at the NHS problem, a combination of 2,4 and 5 above would largely solve the NHS workforce issue (there will always be some outliers for whom a tax charge would arise where pension growth and income are high) without opening the floodgates to other sectors and would bring more fairness to the system. Option 7 is unpalatable to the NHS as it also reduces pension benefits as a by-product of reducing the tax. Option 8 would prove popular but as yet unexplored by the Government on the face of it.

To do full justice to the OTS and their role in advising the chancellor on setting policy then scrapping the Annual Allowance in Defined Benefit schemes and Lifetime Allowance in Defined Contribution schemes would be the most robust route forward and avoids having to constantly revisit this issue ad nauseam.

Doing nothing will see the issue worsen as any brought forward unused allowances from earlier years will now have been used up in many cases. This is a crucial time for the problem to be resolved rather than applying more “sticking plaster” solutions and decisive action is needed.