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UK health minister warns that NHS pension plan may amount to tax avoidance

Monday, 25 November, 2019

Secretary of State for Health and Social Care Matthew Hancock has written to NHS England Chief Executive Simon Stevens warning that the NHS' offer to pay senior clinicians' pension tax charges could constitute 'tax avoidance'.

The charges have arisen because of the annual pensions allowance imposed on high-earning pension scheme members in the 2016 budget. The 'tapered annual allowance' rules introduced in April 2016 reduce the usual GBP40,000 annual pension contribution allowance by GBP0.50 for every pound earned above an annual income of GBP150,000. Those making contributions above the allowed amount have to pay an annual charge of up to 45 per cent. The contributions being paid into the NHS pension funds of many well-paid clinicians exceed this annual allowance, and the automatic imposition of tapered tax charges has induced some doctors to either stop accepting overtime work or to take early retirement.

To counter the resulting staff shortages, last week NHS England published a plan under which doctors could elect for these charges to be paid out of their pension fund. Later, when the doctor retires and takes benefits, the NHS as employer will reimburse these payments back to the pension fund. This would apply to any work that results in a tax charge being applied in 2019/20, not just additional shifts, though it would not cover tax charges on earnings from private practice. Moreover, the proposals relate only to 2019/20 tax payments. Clinicians who incurred large annual allowance tax charges for 2018/19 will still need to pay these in January 2020.

Hancock agreed that this 'scheme pays' proposal was 'operationally necessary' to avoid winter staff shortages. But he told Stevens that they are an example of tax planning. He told Stevens the details should be designed to minimise the risk that they amount to tax avoidance, which he said was incompatible with tax rules for public bodies.

'I accept your judgment too that this cannot wait until after the general election, and on that basis I am advised that its announcement is compatible with pre-election guidance', wrote Hancock. 'As set out, the proposals which you plan to introduce for “scheme pays” for the 2019/20 tax year constitute an example of tax planning. Depending on the detail of how you put the proposed approach into practice, the scheme could constitute tax avoidance. In deciding on this detail, you should seek to minimise this risk.'

Sources