Andrew Tully: Tapered annual allowance change is ‘sticking plaster solution’

Andrew Tully explains the Chancellor's tapered annual allowance changes and asks if the solution is just papering over the cracks

The main pension announcement in the recent Budget saw changes to the horribly complex tapered annual allowance (TAA) rules.

Many of us would have liked to see the TAA scrapped altogether and while the Chancellor didn’t go that far, the measures do significantly limit the impact on clients.

The new rules apply to benefits built up from 6 April 2020, and mean both TAA income limits increase by £90,000. Threshold income, which broadly speaking is taxable income less personal contributions to a pension, goes up from £110,000 to £200,000. Adjusted income, which in simple terms is taxable income plus employer pension payments, rises from £150,000 to £240,000. The TAA is triggered when both the threshold income and the adjusted income exceed their designated limits.

The positive aspect means many more people will be able to pay in up to the normal annual allowance of £40,000 a year (or build up benefits to the value of £40,000 for those in defined benefit schemes). The downside is the annual allowance can, in future, fall as low as £4,000 for the highest earners, rather than £10,000. However this only affects those with adjusted income in excess of £312,000.

Tapered annual allowance can continue to be carried forward from the previous three tax years in the same way as the normal annual allowance.

Doctors

These changes are largely due to the impact of the previous TAA rules on doctors, many of whom have high earnings and build up significant pension benefits. This has resulted in some doctors receiving high tax bills or seeing their future pension benefits reduced, which in turn has made some reluctant to take on additional overtime. The Budget announcements may help reassure some doctors they can take on additional work without worrying about unexpected tax bills, which the government will want them to do given the potential impact of coronavirus on NHS resources.

The TAA has also affected some private sector employees.

Difficulties have arisen as many haven’t known final earnings figures until either very late in the tax year or until the following tax year. Which makes planning pension payments difficult. These changes don’t remove that particular complexity but it does significantly reduce the numbers of people who are affected.

It’s worth noting the new rules apply in respect of the 2020/21 tax year, and so won’t help people who are affected by the tapered annual allowance in this tax year.

Example of Tapered Annual Allowance

In 2019/20

Hassan has an annual salary of £190,000 and receives employer pension contributions of £16,000. His adjusted income is £206,000. This is £56,000 over the threshold of £150,000.

His tapered annual allowance is £12,000 (normal £40,000 AA reduced by £1 for every £2 income exceeds £150,000), and so he will either have to use carry forward or face a tax bill.

In 2020/21

He receives a pay rise from 6 April 2020 and his new salary is £210,000 and the employer pension contribution is now £20,000. His adjusted income is £230,000.

This is below the new adjusted income threshold of £240,000 so he has an annual allowance of £40,000.

 

This feels like a sticking plaster solution. It doesn’t solve the underlying problem but it does remove, for now, the impact on many of the people hit by the complex TAA rules.

While there is much to be uncertain about over the next few months, the government is due to have another Budget in the autumn, which gives a further opportunity for more fundamental reform of the pension tax rules.

Andrew Tully is technical director at Canada Lifg