Government tax advisers suggest removing annual allowance cap on pensions

The annual allowance cap on pension contributions could be scrapped for defined benefit schemes such as NHS pensions under proposals highlighted by government tax advisers.

HM Treasury (Photo: Ray Lipscombe/Getty Images)
HM Treasury (Photo: Ray Lipscombe/Getty Images)

A report published this week by the Office for Tax Simplification (OTS) - which provides independent advice to the government on tax - highlighted 'increasing concern' that the current annual allowance mechanism can 'produce an effective marginal rate of tax, such that it is no longer in some doctors’ interests to do additional work'.

Punitive charges on pension contributions have hit the NHS workforce hard - with a BMA report earlier this year revealing that in parts of England almost every GP had either reduced their working hours or planned to do so to avoid the tax penalty.

The OTS report welcomed an 'encouraging' government announcement earlier this year that the Treasury would review annual allowance tapering rules - and proposed scrapping the annual allowance mechanism altogether for defined benefit models such as the NHS pension scheme.

Pension tax

It said: 'The lifetime allowance charge and the annual allowance charge can present significant complexities for pension savers in different circumstances, and in either defined benefit or defined contribution schemes.

'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 defined contribution schemes and the lifetime allowance in relation to defined benefit schemes, reflecting the most natural operational
and administrative fit between the two approaches and the type of scheme involved.'

BMA pensions adviser Dr Tony Goldstone wrote on Twitter that he was 'delighted' that the OTS had included the proposal to scrap the annual allowance in defined benefit schemes in its report - and that he had suggested the move. He added: 'Let's hope government listens.'

NHS pension scheme

In a bid to address the impact of pension tax on the NHS workforce, the government has proposed to create the 'most flexible NHS pensions ever'. It is consulting on a scheme to help doctors avoid hitting the annual allowance cap by reducing their pension contributions and slowing down the growth of their pension pots.

These proposals have been heavily criticised, however, with experts warning the move will simply slash the value of doctors' pensions and may not go far enough to remove the disincentive to take on extra work - and health and social care secretary Matt Hancock has admitted this option could be ditched if the Treasury reforms the annual allowance mechanism.

NHS England chief executive Simon Stevens spoke out earlier this year on pension tax - warning the government that 'significant further action' was needed to stop heavy tax penalties undermining the NHS workforce.

The OTS report said: 'The OTS awaits the outcome of the review of the tapered annual allowance and stands ready to assist with any further work in this area. As the legislation produces distortions in behaviour that have negative effects such as those in the NHS, it seems sensible this legislation should be reviewed with a clear focus on its wider impact.'

Specialist medical accountant Andrew Pow, executive board member of the Association of Independent Specialist Medical Accountants (Aisma) and a partner at Mazars UK, said: 'We welcome this report from the OTS, which has acknowledged the distortive effect of the annual allowance tax charge on members of the NHS pension scheme.

'In particular, we welcome the suggestion that the annual allowance regime could be simplified and the annual allowance removed for defined benefit schemes such as the NHS pension scheme.'

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