Andy Cowper discusses the issue of the taper tax on pension contributions
To put it mildly, I am not an expert about pensions.
Equally, I am not going to rise to this week’s provocation by Secretary Of State For The Time Being Matt ’Ancock, whose weird article for Conservative Home tries to pretend that the Conservative And Unionist Party were the “original party of the NHS”.
This is merely a rip-off of Jeremy Hunt’s 2017 conference speech while he was still at Health in which he attempted to claim the NHS for Conservative war time health minister Henry Willink.
This is historical nonsense, as I pointed out at the time.
As health economist Karen Bloor noted, Charles Webster’s definitive The NHS: A Political History finds quite otherwise: “Willink’s 1944 white paper [was] described as ‘long, diffuse and confusing’ . [His] 1945 proposals [were] rejected by everyone. Translating Beveridge into reality ‘was no nearer realization in 1945 than it had been in 1942’ … by 1945 ‘the health scheme was on the verge of becoming a particularly unhappy compromise, incapable of commanding support from any group, and offensive to all’.”
Anyone knowledgable about history, public policy and politics would know the role of Beatrice Webb and the Fabians in the conceptualising and promotion of the UK’s social security system, strongly influenced by George Bernard Shaw.
Indeed, the Conservatives voted 51 times against the National Health Service Bill in 1946.
So there I am, not rising to it. At all. In any way.
Back to pensions. As I mentioned last week, the issue of the taper tax on pension contributions is becoming a live one for the NHS.
Josephine Cumbo of the Financial Times has written a further in-depth analysis of the issues. To quote her excellent piece, “people saving for retirement benefit from tax relief on what is paid into, or accrued, in a pension, are subject to annual and lifetime limits. The standard annual allowance is £40,000, which is more than adequate for most average earners. Pension savings in excess of the allowance face a tax charge, payable at the same rate as an individual’s rate of income tax.
“However, in 2016, new curbs were introduced on tax relief for the UK’s top earners who benefit from the lion’s share of government incentives for pension saving. The so-called tapered annual allowance gradually reduces the annual allowance from £40,000 to just £10,000 for the very highest earners.
“Complex rules governing how the taper is applied, coupled with the inflexibility of the NHS pension scheme, have led to thousands of staff receiving a tax penalty — often as the result of taking on extra shifts to help manage the workforce crisis in the health service”.
Cumbo cites examples of senior clinicians refusing to take on extra shifts having been hit for huge tax bills by the complexity of this scheme. Those of you who follow senior medics on Twitter will also have heard some of the cries of pain.
How the taper works
This scheme sees the annual allowance on pension contributions scale down from £40,000 to a floor of £10,000 for those with “adjusted” annual incomes of £150,000 to £210,000.
Crucially, Cumbo explains that this “adjusted” income figure “includes employer pension contributions — these can be quite a lot higher for many NHS workers, compared with the private sector, as they are saving into a ‘defined benefit’ scheme. Staff with a ‘threshold income’ of greater than £110,000 can still find that they fall into the ‘taper zone’. As the salaries of most hospital consultants and GPs start from around £77,000, large numbers find themselves at risk — particularly if they do extra shifts or private practice”.
What is the aim of the tapered annual allowance? It seems mainly designed to prevent individuals earning high incomes from benefitting on the government’s 100 per cent relief on income tax for personal pension contributions. The scheme is quite well explained here.
Even with this explanation, the scheme is complex and hard to fathom. In Wealth of Nations, Adam Smith proposed that taxes should observe the canon principles of equity, certainty, convenience and efficiency.
It is clear that this taper tax breaches these principles. Senior clinicians are the group of whose labour the NHS is going to need to buy more if the waiting backlogs are to be addressed. A solution will need to be found to this one, pronto.