The FT today reports recently-appointed Chancellor Rishi Sunak will raise the point at which the pensions annual allowance taper kicks-in from £110,000 to £150,000 - https://www.ft.com/content/f41a1f80-5eed-11ea-b0ab-339c2307bcd4?desktop=true&segmentId=7c8f09b9-9b61-4fbb-9430-9208a9e233c8#myft:notification:daily-email:content
Tom Selby, senior analyst at AJ Bell, comments:
“The new Chancellor is under significant pressure to ease the strain on the NHS being caused in part by the annual allowance tax taper – pressure that could intensify if the coronavirus outbreak continues to worsen.
“While raising the point at which the taper kicks-in from £110,000 to £150,000 is better than nothing, it feels like a half-baked solution which fails to address the core problem – namely that senior doctors are unsure whether they will be clobbered by tax charges if they take on extra shifts.
“The Treasury’s apparent attachment to the hideously complex annual allowance taper is damaging both to the NHS and the wider pension tax regime. It would make much more sense to simply scrap the taper as part of a wider simplification agenda designed to make the system of tax rules governing people’s retirement savings easier to navigate.
“As well as ditching the taper, the Treasury should also consider doing away with the poorly understood ‘money purchase annual allowance’ and returning to a framework where tax relief costs are controlled by just a single annual and lifetime allowance.
“This would at least give savers a fighting chance of understanding how much they can pay into their pensions.”
How the annual allowance taper works
Whether or not someone is affected by the annual allowance taper depends on two things: ‘adjusted income’ and ‘threshold income’. Broadly, adjusted income includes all taxable income and employer pension contributions.
Threshold income is total taxable income and any salary sacrifice arrangements set up since 9 July 2015 less any personal pension contributions. Any lump sum death benefits where the recipient is liable to tax are also deducted from both income measures.
If someone’s adjusted income is above £150,000 and their threshold income is above £110,000, they will be affected by the taper. Their annual allowance will be reduced by £1 for every £2 of adjusted income above £150,000.
For example, if their adjusted income was £160,000 for a given tax year their annual allowance would drop by £5,000 to £35,000.
