Government advisers urge 'game-changing' review of NHS pensions tax
A governmental tax body has recommended ministers consider dropping the lifetime tax allowance on the NHS Pensions scheme in what medical accountants have described as a 'game-changing' move for GP pensions.
A report by the Office of Tax Simplification (OTS) last week recommended that the Government review and simplify pensions tax allowances to give GPs and other doctors ‘more ability’ to plan their pension.
It highlighted that annual allowances and lifetime allowances can be ‘disproportionate’ for higher-paid workers in defined benefit schemes – such as the NHS pension scheme – which then makes it costly to conduct additional work.
The Department of Health and Social Care recently admitted a third of GPs and consultants could refuse to take on extra shifts to avoid current pension tax charges and subsequently launched a review of the system.
The OTS report concluded: 'Given the policy aim of limiting the overall amount of pensions savings tax relief available to any one individual, applying both the annual allowance and lifetime allowance charges to pensions may be unnecessary.
'One possibility would be for the annual allowance to apply in relation to direct contribution schemes and the lifetime allowance in relation to direct benefit schemes, reflecting the most natural operational and administrative fit between the two approaches and the type of scheme involved.
'This approach to simplifying things for most people would, of course, involve an additional complexity for people who have saved into both a direct benefit and a direct contribution pension.'
The OTS report made the following recommendation: ‘The government should continue to review the annual allowance and lifetime allowances and how, in combination, they deliver against their policy objectives, taking account of the distortions (such as those affecting the National Health Service) they sometimes produce.’
Andrew Pow, executive board member of the Association of Independent Specialist Medical Accountants (AISMA), said the OTS has made a ‘very sensible suggestion’ but whether the Government adopts them is ‘another matter’.
He added: ‘This report is really useful because A) it highlights and confirms the issues, in particular with reference to the NHS and B) it goes as far as to recommend that they have to simplify it all.
‘There is also a further paragraph which goes quite a long way and says one of the solutions may be - with schemes like the NHS pension scheme - to move away totally from controlling the tax relief on pensions through the annual allowance and cap on the maximum to which your pension can grow - called the lifetime allowance - and use the tax rules through that to restrict tax relief.
‘If that happens, that will be a complete game-changer because it will give people a lot more ability to plan what is happening with their pension. They wouldn’t get the in-year massive tax charges because the lifetime allowance is the tax charge on the benefits at the end, so you wouldn’t get horrible tax charges at the end of the year.
‘If it went to that level, personally, I think it will give the Government what it needs in terms of trying to restrict tax relief and secondly it gives everyone the flexibility to go back and work as hard as they want to.’
OTS chair Kathryn Cearns OBE said: ‘This report focuses on individuals’ experience of the tax system at significant points in their lives, complementing a previous OTS report on simplifying everyday tax for smaller businesses. The OTS’s recommendations offer a range of ways in which the tax system can be improved for everyone.’