Pensions: Doctors welcome government’s decision to abolish lifetime allowance

In his spring budget for 20231 the UK chancellor Jeremy Hunt unveiled a major policy for tackling the number of senior NHS doctors reducing their hours or taking early retirement because of high taxation charges on their pensions.

In a surprise move, Hunt announced a package of measures, including scrapping the lifetime allowance on how much can be saved tax free in an NHS pension and raising the threshold for the annual allowance.

What changes has the government announced? From April 2023 the lifetime allowance on how much can be saved tax free in an NHS pension will be removed. It will be abolished entirely from April 2024 in a subsequent finance bill. Hunt had been expected to lift the cap on how much can be saved tax free from £1 073 100, but instead opted to scrap the charge. The maximum Pension Commencement Lump Sum (the amount you can take out as a tax free lump sum when taking benefits) will stay at the current level of £268 275 and will be frozen thereafter, the Treasury added. Alongside this, the annual allowance (the amount of money that can be put in a pension pot tax free each year) will increase from £40 000 to £60 000 from April 2023. Individuals will continue to be able to carry forward unused annual allowances from the three previous tax years. The money purchase annual allowance, which applies to those that take money from a defined contribution pension pot, will increase from £4000 to £10 000. The tapered annual allowance (which limits the amount of tax relief a high earner can claim on their pension savings by reducing their annual allowance depending on their level of taxable income) is being retained but will rise from £4000 to £10 000 from 6 April 2023. The BMA had asked for this to be scrapped. The adjusted income threshold for the tapered annual allowance will also increase from £240 000 to £260 000 from 6 April 2023. This means that for every £2 a person’s adjusted income goes over £260 000, their annual allowance for the current tax year will reduce by £1. As a result of the threshold rising, the expectation is that fewer doctors will have their annual allowance for that tax year restricted. In addition, the government said that it would be linking open and closed public service pension schemes for the purposes of calculating annual allowance charges, to tackle negative pension input amounts that affect how much tax an individual has to pay. The change will allow members “to offset any negative real growth for annual allowance purposes in legacy public service pension schemes against the annual allowance.” Posting on Twitter2 Tony Goldstone, deputy chair of the BMA pensions committee, said that this was a positive step, as it meant that negative growth in one scheme such as the 1995 benefits scheme can be combined with positive growth in 2015 so “only real growth above inflation is measured.”

Why has the government chosen to act now? The number of senior doctors reducing their hours or retiring because of punitive taxation on their pension has been exacerbating the NHS workforce crisis. The NHS has just had one of the toughest winters on record and is struggling to tackle the huge backlog in treatment that worsened during the covid-19 pandemic, so cannot afford to shed further staff. Hunt spent more than six years as health secretary between 2012 and 2018, which has given him an understanding of the problem. He also chaired the House of Commons Health and Social Care select committee from 2020 to 2022, during which he produced a report acknowledging3 that action is needed to tackle the “national scandal” of doctors feeling forced to retire to avoid facing punitive tax bills on their pensions.

What impact will the changes have? The Treasury said that the move had been made “to incentivise highly skilled individuals such as NHS clinicians to remain in the labour market by reducing the risk of incurring significant pension tax charges.” The Treasury has estimated that the pension changes will mean that 80% of NHS doctors “will no longer face an unexpected tax charge, with respect to any accruals under the 2015 career average NHS pension scheme.” Abolishing the lifetime allowance would remove barriers to remaining in work and simplify the tax system by taking thousands out of “the complexity of pension tax,” it added.

The BMA hailed the announcement as a potentially transformative one in terms of stemming the flow of senior doctors who had been reducing their hours or leaving the profession entirely to avoid tax bills. In a statement,4 Vishal Sharma, BMA pensions committee chair, said, “We are pleased that after many years of BMA campaigning, the chancellor has finally taken meaningful steps to tackle the impact of punitive pension taxes. “The scrapping of the lifetime allowance means that doctors will no longer be forced to retire early because of pension tax. This will help us to retain our most senior doctors who have a vital role to play not only in providing care for patients but in teaching and mentoring their junior colleagues. The rise in the annual allowance to £60 000 will mean that far fewer doctors receive large unexpected tax bills and will significantly reduce the perverse incentive to reduce hours.” Sharma said that while the changes were “an important step forward,” some doctors will still face additional tax bills. He said that because the tapered annual allowance has only seen minor changes, doctors close to or above the thresholds will still need to be cautious before taking on extra shifts or doing overtime. “The tapered annual allowance needs to be scrapped,” he said.5

Will sorting out pensions solve the NHS workforce crisis? Sarah Clarke, president of the Royal College of Physicians, said that the changes to pensions were welcome, but that more needed to be done on the workforce. “We need to increase the number of doctors and retain those earlier in their careers by ensuring they have good working conditions and feel supported and valued,” she said. Matthew Taylor, chief executive of the NHS Confederation, said, “Lifting the lifetime and annual allowance will help incentivise more medical staff to carry out extra shifts—this is vital if we are going to reduce waiting lists. But we are facing a staffing crisis in the NHS and this budget does not provide any further clarity on how the government is going to tackle it.”