The Government has promised to address problems caused by the limits on pensions tax relief that were introduced for high earners in 2016. In a letter to the BMA chair, the new Secretary of State for Health and Social Care, Matt Hancock, signalled a change to the NHS Pension Scheme, to allow excess tax charges to be paid from pension benefits.
If the value of pension benefits increases by more than the annual allowance (currently £40,000) in one year, an upfront tax charge is payable. But for every £2 of income above £150,000 per annum (which includes the value of pension contributions), £1 of annual allowance is lost. The upfront tax charge is a particular problem for members of defined benefit schemes, since the value of pension benefits is defined not by the value of the cash invested, but by a multiple of the pension benefits the member is entitled to receive on retirement. So defined benefit members cannot control the increase in the value of their pension benefits without leaving the scheme, and will not necessarily have the cash to meet the additional tax charge that will arise each year the annual allowance is exceeded.
Many defined benefit members can ask for the tax charged on excess income to be paid from their pension (known as scheme pays), but the NHS Pension Scheme only provides this facility if the full annual allowance is exceeded, not the lower level for high earners. This has reportedly led some doctors to leave the scheme altogether, rather than find the money upfront to meet the tax charges.
The letter from Matt Hancock, which also promises to address a number of other issues raised by the BMA, confirms that the NHS Pension Scheme has been asked to introduce a scheme "pays facility" to address this issue as soon as possible.