The tapered annual allowance has been ‘significantly increased’ by Chancellor Rishi Sunak after it left senior NHS staff with hefty pension-related tax bills due to working extra shifts.
High earners were hit with tax penalties for breaching the tapered annual allowance which led consultants and GPs into refusing to take extra shifts as they would lose out financially.
However, Sunak addressed the taxation anomaly in his first Budget speech yesterday (11 March).
Sunak said: “The pensions tax system is preventing doctors taking on more hours.
“To significantly reduce the amount of people the tapered annual allowance affects, I am increasing the taper threshold by £90,000 removing anyone with income below £200,000. Based on their vital work for the NHS that will take around 98% consultants and 96% of GPs out of the taper altogether.”
Ex-pensions minister Steve Webb, now a partner at LCP, said the tweak was a missed opportunity.
Steve Webb, partner at LCP said: “The system of pension tax relief is far too complicated and this is a missed opportunity to make the system simpler and clearer. Although raising the thresholds will substantially reduce the number of people affected by the tapered annual allowance, some higher earners are still at risk of being caught, especially if they get a promotion or take on additional responsibilities. What was needed was sweeping simplification but what we got was more Treasury tweaking.
“The unintended consequences of this complexity have been seen most clearly for senior NHS staff. With the pressure on the NHS arising from the coronavirus outbreak, it is even more urgent that doctors can put in extra hours without the risk of unexpected pension tax bills. Although most doctors will now be excluded from the tapered annual allowance it would have sent a much clearer message to abolish the taper altogether.”
Provider Royal London agreed it was a missed opportunity.
Clare Moffat, head of business development at Royal London, said: “The Chancellor’s decision to raise the threshold at which the tapered annual allowance kicks in is welcome but the pension tax system remains overly complex.
“In reality, the Chancellor has missed the ideal opportunity to massively simplify the system by removing the taper altogether.”
Svenja Keller, head of wealth planning at Killik & Co, added: “The change to pension rules for doctors – with more clarity and support for their annual allowance conundrum – is great news and, at long last, should be a significant boost to frontline healthcare.
“That said, by trying to help NHS doctors the increase in allowance threshold is now applicable to everyone. Why not just abolish it? This would have brought far more simplicity and the threshold is now so high that it will take many out of the tapering regime regardless.”
Les Cameron pensions and tax expert at Prudential UK welcomed the move but added the industry was still left with a complex piece of legislation.
“Reducing the taper charge to £4,000 will see an increase in the annual allowance charge of £2,700 for those who are fully impacted i.e. those with adjusted income of over £312,000,” added Cameron.
Supporting Budget documents confirmed the £90,000 increase would mean from that from 2020/21 the “threshold income” will be £200,000, so individuals with income below this level will not be affected by the tapered annual allowance, and the annual allowance will only begin to taper down for individuals who also have an “adjusted income” above £240,000.
For those on the very highest incomes, the minimum level to which the annual allowance can taper down will reduce from £10,000 to £4,000 from April 2020. This reduction will only affect individuals with total income (including pension accrual) over £300,000.
It added: “Proposals to offer greater pay in lieu of pensions for senior clinicians in the NHS pension scheme will not be taken forward.”
Budget documents also reveal the lifetime allowance – the maximum amount someone can accrue in a registered pension scheme tax-efficiently over their lifetime will increase in line with the Consumer Prices Index for 2020/21, rising to £1.73m.