A&E hospital waiting times have hit their highest levels since targets were set back in 2004, and what might be surprising to some, is that tax legislation has a lot to do with it.
No it’s not Brexit, although that will surely mean the NHS hits a few speed bumps in the next year or so, that’s causing NHS waiting times to spiral, and it’s not an immigration issue. It is, in fact, tax. And it’s not only A&E waiting times, the crisis affects all corners of the NHS including cancer treatment waiting times (can you imagine waiting more than 62 days to start cancer treatment?!) and consultant waiting times.
And now with reports of the likely increase in patients and families suing the NHS for inadequate treatment, things are likely to get worse for the cash-strapped NHS and the staff who are going above and beyond for their patients.
Why Are Taxes Affecting NHS Staff?
The crisis, is in a large part, due to the NHS’s response to public sector off payroll working legislation, more commonly known as IR35 Public Sector Reform. This is back in the headlines this year, after coming into effect in April 2017, because the Government – believing the reformed legislation has been a huge success – are now rolling out the same in the private sector.
Another area where the Government has made the problem worse is the Pension Annual Allowance charge and the Tapered Annual Allowance Charge, which the Government had to know would hit senior NHS staff with unexpected and unfair tax bills.
So we have several big tax updates in the last few years, which will mean that by working more, NHS consultants and senior staff will receive less money. Smart.
Our Client’s Story
IR35 reform, in particular, had a huge impact on a Warr & Co client, who opted to retire, here’s his story.
Our client was aged 70 and retired from his employed role within the NHS, rather than leaving work altogether he decided to contract, opting to take on short-term contracts in all corners of the UK – he would go wherever his skills were most needed. He was often travelling over 200 miles to these new workplaces, and renting short-term accommodation nearby. He was also in receipt of his NHS pension and his state pension, as well as accumulating money within his limited company.
Being a dedicated and highly skilled medical professional, he had a real passion for his work, and in his more advanced years had the freedom to be able to make a big difference in the NHS by acting as a flexible resource. But when faced with Public Sector IR35 he saw that his rate would be cut by 12.5% to fund employers NI and the apprenticeship levy, he would pay 40% and 45% tax on the remaining money, he would lose his personal allowance, and he would have to pay his travelling, accommodation and subsistence expenses out of what was left. He took the sensible decision to stop working and spend time with his family instead.
Why Are NHS Contractors Being Labelled As Inside IR35?
You see the NHS decided, like pretty much all UK banks have now decided, that the sheer number of contractors on their books would create an insurmountable amount of admin to sort out. So instead of going through them one-by-one, they would say all frontline medical staff were inside IR35 – just to be safe – and that they’d need to operate in the NHS via an umbrella company of the NHS’s choosing – just to be extra safe. Interestingly, the same is not true of the NHS’s internal IT contractors, who were individually assessed.
What the NHS unwittingly did at this point in time was going to destroy their much needed flexible medical workforce.
Our contractor found that his tax bill increased dramatically, his travel and accommodation expenses could no longer be covered by his company and he would now be receiving very little money for his efforts. Working as a contractor Inside IR35 simply wasn’t going to make ends meet any longer, and the same is happening up and down the country.
What’s Happening With NHS Staff Pensions?
A combination of pension tax legislation is negatively affecting senior NHS staff, many of whom do not have a thorough understanding of the pension tax picture. The Lifetime Allowance, Annual Allowance and Tapered Annual Allowance together can mean that highly paid NHS workers, as well as other public body workers, are actually losing money by staying in work longer, picking up extra shifts, and getting promoted.
Firstly, let’s take a look at these three elements in a little more detail:
The Annual Allowance. This is now capped at £40,000 per year, if you contribute more than this to your pension savings you may have additional tax applied. The annual allowance used to be as much as
The Tapered Annual Allowance. If your income from all sources is over £110,000 and your income plus pension contributions total over £150,000 per year, your annual allowance will be tapered. For every £2 over £150,000, you’ll lose £1 of annual allowance. So for example, If you earn £180,000, that’s £30,000 over the threshold, and you’ll lose £15,000 of your annual allowance (previously £40,000). Your new tapered annual allowance is £25,000. If you contribute more than £25,000 to your pension you will be taxed. The maximum reduction on annual allowance is set at £30,000, so in cases where an individual is earning over £210,000, the maximum annual allowance is as little as £10,000.
Lifetime Allowance. The amount that can be drawn without additional tax for 2019/20 is £1,055,000. If you accrue more than this then you will have to pay additional tax of 55% – even if that money has already been taxed by 40 – 45% due to exceeding the annual allowance.
A big problem for NHS workers is that they often have defined benefit schemes, and sometimes won’t know what these will include in detail. That plus an understandably vague comprehension of this tangled mess of a tax system leads to confusion, and we’re now frequently seeing public body workers who are receiving surprise tax bills.
The BBC recently reported on a case of a senior NHS staff member who was promoted resulting in a £180,000 tax bill:
“Dr Rosser said he had incurred a pension-related tax bill of £180,000, in addition to income tax, following promotion to chief executive. “Actually it’s costing me £50,000 to come to work in my first year as chief executive,” he said. Dr Rosser said he was aware of another chief executive in a similar situation. In 2016, the way pensions were taxed changed. That, and the nature of NHS pensions, have meant consultants and others earning more than £110,000 a year risk large unexpected tax bills when their income increases” Read the article here.
Those who do have a thorough understanding of pension tax legislation and/or have consulted an accountant about their finances are making the smart decision to turn down extra work or promotions to ensure they don’t lose money.
“The combination of these provisions can leave highly paid individuals with a defined benefit scheme with an unexpected increase in their personal tax bill of up to (30,000 x 45%=) £13,500 per year. Many of those affected work for the Public Sector, such as BBC; NHS Consultants; GP Doctors; Judges; Heads of Educational establishments, Police etc. Others will be in executive positions in private organisations that offer defined benefit schemes, or may unexpectedly suffer a charge due to a bonus award or other payment to recognise exceptional service. Although highly paid individuals, many will have a life style and financial commitments that would not easily accommodate such an unexpected hit to their cash flow.” Read the article here
IR35 Public Sector reform and the pension legislation have caused a disaster, in some industries more than others, and particularly for the NHS. And it’s in the NHS that this huge, life changing impact is being felt by the public. And of course, NHS contractors quitting is certainly going to mean less money going back into HMRC, so it’s hard to see the up-side for the Government at this point.
So what’s next for the NHS and taxes, can this be fixed? That’s up to the Government, but if the NHS properly assessed contractors and gave them a fair IR35 determination we believe most would be found to be outside IR35 and happy to continue working, just as our client would have. But the Government and the NHS still need to look at the unfair Pension Allowance equations too, though this has apparently been ruled out earlier in July.
What’s next for private sector IR35 reform? Well, we have to wait and see whether public sector lessons will be learned or not.