Adrian Boulding: Why the tapered annual allowance has to go
'Volte-face'
Adrian Boulding looks at the unpopular tapered annual allowance and predicts its imminent demise...
After more than a year's hard-fought campaign by the British Medical Association (BMA) on behalf of senior NHS clinicians affected by the tapered annual allowance (TAA), it seems highly likely that both the Treasury and the Department of Health and Social Care will enable changes to be made to the NHS pension scheme to limit or eliminate its negative effects.
The TAA currently affects some 17,000 experienced doctors and consultants earning above the £150,000 - the TAA's annual earnings threshold.
This volte-face has been brought about because the TAA breaches one of the principles of taxation, namely that those paying taxes should not be taken by surprise by large unexpected tax bills.
How does the TAA work?
A doctor sees their standard annual allowance (the amount they are allowed to put into their pension in a given tax year) of £40,000 fall by £1 for every £2 of income above the £150,000 threshold they earn (including employer pension contributions, dividends, interest, benefits in kind, income from private work).
The means that all senior staff earning more than £210,000 find the annual amount they are allowed to pay into their pension, or the value of their defined benefit accrual, drops to just £10,000 - that's less than 5% of their earnings and much less than anyone should be saving for their retirement.
Many have been hit with large tax bills as they ready themselves for retirement in a few years' time, others are cutting hours or retiring early.
When the BMA conducted a pensions survey of more than 16,000 of its members during last year, it was horrified to find that 42% of GPs have already reduced the number of hours spent caring for patients because of actual or potential pension taxation charges and 34% of GPs planned to reduce their hours during 2019/20.
Dr Richard Vautrey, chair of the BMA GP committee said: "These results show the extent to which GPs are being forced to reduce their hours or indeed leave the profession altogether because of pension taxes. With patient lists growing and the numbers of GPs falling, swift and decisive action is needed from the government to end this shambolic situation and to limit the damage that a punitive pensions taxation system is inflicting on doctors, their patients and across the NHS as a whole."
For hospital consultants, 30% have already reduced their hours. When it comes to planning to reduce their hours, a shocking 40% of consultants told the BMA that was their intention. Across the country, several hundred thousand hours of patient treatment time is being lost.
This is well-trodden economic territory: the TAA sits on the right-hand side of the Laffer Curve, in the territory where increasing tax rates actually reduces the total revenue raised because those being taxed alter their behaviour and reduce their income or consumption.
The TAA, introduced in April 2016 by then Chancellor George Osborne was one of several manoeuvres designed in the era of austerity to help cut the Treasury deficit. It arrived at the same time as lifetime allowance cuts which also hit GPs and consultants with generous DB pensions that often exceeded the new LTA threshold, sparking a period of leakage of senior talent from the NHS.
So, if it's looking increasingly clear that the Treasury will scrap the TAA for doctors, surely it must be scrapped for all high earners?
We can't have one tax rate for a medical doctor and a different rate for the business entrepreneur who invents and builds the fantastic life- saving technologies that doctors have at their disposal today.
£1bn Treasury gain
The only problem then, is how will the Treasury find the £1bn that the TAA generated in the last financial year and more importantly the £1.6bn which this tax was scheduled to deliver into Treasury coffers by 2023/24?
If they want to take it from pensions then what this whole futile exercise has reminded us is that if you want to raise serious revenue, then apply a small tax across a wide-base and don't attempt a large tax across a narrow-base.
There is a lesson in here for us all: whenever personal finances permit, we should maximise our usage of pension and ISA allowances each year, as they may not always be as generous.
Adrian Boulding is head of retirement strategy at Dunstan Thomas
