Jeremy Hunt has announced major changes to the pension tax regime in his first Budget today, aimed largely at stopping experienced doctors from retiring early.
Mr Hunt announced the lifetime allowance on pensions – the amount a person may save into their pension during their lifetime before incurring tax – would be abolished.
The move was aimed at getting workers who have taken early retirement or reduced their hours because of the cap back into the workforce. Its impact on the NHS pension scheme is particularly acute and has been blamed for encouraging consultants to leave the health service early.
The lifetime allowance charge – the amount somebody is taxed when they take money out of their pension if they have exceeded their lifetime allowance – will be removed next month, while the allowance itself will be scrapped entirely in a future finance bill.
Mr Hunt also increased the annual allowance to £60,000 from April 2023, a 50 per cent increase from £40,000. The annual allowance – the amount a person may save to their pension each year before being taxed – has similarly been blamed for encouraging those in the NHS to leave the workforce or cut their hours.
“I don’t want any doctor to retire early because of the way pension taxes work,” Mr Hunt said, as he announced today’s changes. He claimed the moves would “stop over 80 per cent of NHS doctors from receiving a tax charge”.
Meanwhile, the Budget documents added the changes would “help remove incentives for doctors to work reduced hours or retire early due to pension tax concerns”.
Other changes to pension taxes include increasing the minimum amount available under the annual allowance taper – which reduces the tax-free allowance higher earners can receive – from £4,000 to £10,000. The Budget also increased the adjusted income threshold – the amount of earnings for pension tax purposes somebody has to earn to trigger the taper – from £240,000 to £260,000. Both of these changes are due to take effect next month.
Commenting on the changes, British Medical Association pensions committee chair Vishal Sharma said: ”We are pleased that after many years of BMA campaigning, the chancellor has finally taken meaningful steps to address 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 retain our most senior doctors who have a vital role to play in not only providing care for patients but in teaching and mentoring their junior colleagues.”
However, Dr Sharma added the union recognised those with earnings around the taper threshold “may still be disincentivised from taking on additional work and said: ”We will continue to lobby government to address these issues.”
Former chancellor Rishi Sunak announced in 2021 the lifetime allowance rate would be frozen at £1.07m – the rate it has been since April 2020 – until April 2026, which was described at the time as a “kick in the teeth” while creating a “severe risk of doctors retiring early, working less or emigrating”.
The lifetime allowance was also cut each year from 2011-12 (£1.8m) to 2016-17 (£1m), before gradually being increased again.
Earlier this month, the government revealed it would be going ahead with other changes to the NHS pension scheme designed to make partial retirement and returning to the health service after retiring more attractive.
Mr Hunt also used his Budget to state that the an NHS long-term workforce plan would be published “shortly”, as ”the government is committed to ensuring [the service] has the workforce it needs for the future”; as will a primary care recovery plan.
There was no change to health or social care revenue spending plans, nor announcements about capital spending — such as to fund the “new hospitals programme” — in the Budget.