“It would be a radical move by the government to pay the pension tax bills of NHS workers. It is an effective admission that the pension annual allowance taper is a broken policy that is too unpredictable and punitive, however it has taken the country to be on the cusp of a winter crisis in the NHS during an election for the government to address it.
“This would be a controversial policy given it offers NHS staff special treatment and ignores large swathes of high earning public sector workers who provide critical services everyday such as judges, teachers and transport workers.
“This quick fix to avert a crisis is the only option open to the government right now. Over the longer term the government should go much further – the noble thing to do would be to accept the taper is not fit for purpose and reverse it.”
Introduced from April 2016, the policy reduces the annual allowance for pension savers with higher earnings, breaking the principal that all pension savers are entitled to relief at their marginal rate of income tax up to the same threshold allowance.
Instead, it penalises higher earners by curbing their entitlement to tax relief on contributions. Individuals with an ‘adjusted income’ of over £150,000 and a ‘threshold income’ over £110,000 are affected.
For every £1 of ‘adjusted income’ over £150,000 an individual loses 50p of their annual allowance. This tapering effect means someone with income of £210,000 is left with an annual allowance of just £10,000, a 75% reduction on the standard £40,000 annual allowance.
The controversial policy has resulted in dire unintended consequences for key frontline workers in public services, especially the NHS. The taper is particularly damaging for workers in public sector DB schemes because of the way their pension accruals are calculated.
Data sourced by Quilter from the Ministry of Justice shows that the issue is not confined to the NHS, with 25% of judges now breaching the annual allowance in another key public service profession suffering recruitment pressures.