Pensions: assessing the annual allowance impact

by Emma Knowles

30 May 2019

The HFMA wants to understand more about the impact of changes to the annual allowance

Public sector pensions are in the news at the moment. There is a lot of discussion in the press and in social media about the impact of the lifetime and annual allowance tax rules on clinicians in the NHS.

Many doctors are reportedly taking early retirement, refusing additional hours, awards or promotions to avoid significant tax bills – sometimes bigger than the increase in their salary. The press and social media coverage focuses on the impact on clinicians, but other long-serving senior managers in the NHS are equally affected.

The problem is that the value of the increase in their pension in the year is more than the annual allowance of £40,000. Those earning more than £110,000 could be subject to a tapered annual allowance, which reduces on a sliding scale to £10,000.

The annual allowance was reduced to £40,000 in 2014 and the tapered annual allowance was introduced in April 2016, so this is not a new issue. Those who have a detailed understanding of tax and NHS pension arrangements will have identified the potential issue when the chancellor announced the changes in the 2015 Budget.

We do not know exactly why this is only becoming an issue now, but we think that, for most people, it was only when tax bills started to arrive that the scale of the issue and its impact began to be discussed between colleagues and on social media.

Initial murmurings about the issue were heard back in January 2018, when the first tax bills under the new tapered annual allowance were calculated as a result of the submission of the 2016/17 tax returns. The carry forward arrangements of allowances would have offset some of the tax charge for that year. However, by January 2019, there would be less allowance available to carry forward, so the bills were likely to be higher and the impact greater. 

The issue is complicated as it combines complex tax rules with a generous, but also complicated NHS pension scheme. The NHS scheme is made up of two different schemes, one of which has two different parts and NHS staff can be members of both schemes. We have been told that it is possible to calculate the impact on your own position, but it takes a lot of time and familiarity with tax rules, the pension scheme and spreadsheets! To try to explain the issue, the HFMA has published a ‘how it works’ briefing and it was also covered more briefly in the June issue of Healthcare Finance.

It is clearly an issue high on doctors’ agenda and many are speaking to independent financial advisers or approaching NHS finance teams for support. Some are leaving the NHS pension scheme or are adding their voices to the BMA’s petition for reform. While the issue has been discussed in terms of the impact on clinicians, it is applicable to everyone (whether in the private or public sector) – it is just that the terms of the NHS pension scheme mean that the lifetime or annual allowance can be met without the individual realising.

The good news is that on 21 May, in response to a question in the House of Commons, the chancellor announced that he has been discussing the issue with the health secretary. Their discussions centre on providing additional pension flexibility for NHS doctors affected by the annual allowance tax charge. It was made clear that there will be no change to the taxation rules. We are told to expect an announcement about the proposed pension flexibility soon.

However, we know that any change in the NHS takes time and amending the NHS pension scheme is likely to require legislation. So we do not expect the announcement to resolve the issue in the short term. The association is, therefore, keen to understand more about the impact on the wider NHS and, in particular, patient care. 

To help us do this, today we’ve launched a survey of finance directors in England. Please click on the link below to access the survey.



Take the HFMA finance director survey : The impact of the pension lifetime and annual allowance on the NHS