Chancellor Phillip Hammond risks setting himself on a collision course with public sector unions if he attacks pension tax relief at next week’s Budget, AJ Bell warns.
Rumours have swelled in recent weeks that the Treasury is lining up a cut to retirement savings incentives to help raise funds for the cash-strapped NHS.
The below table shows how a reduction in the annual allowance from £40,000 to £30,000 or £20,000 could hit public sector workers.
While the current allowance only affects those at the very top of the pay scale earning over £150,000, reducing it risks dragging in those with much more moderate salaries. A reduction to £30,000 could result in people earning £115,000 or more being hit and halving it to £20,000 could mean anyone earning £80,000 or more could fall into the pension tax danger zone.
Anyone who exceeds the annual allowance faces paying a tax charge to recoup tax relief paid out on their contributions.
Tom Selby, senior analyst at AJ Bell, comments:
“While very few private sector workers would be constrained by a £20,000 yearly allowance, hundreds of thousands of public sector staff would likely be caught.
“We are not talking about the super-rich here – many doctors, head teachers and senior civil servants who might not dream their pension would be worth this amount risk being hit. If they breached the annual allowance limit, HMRC would claw back any tax relief received above this level.
“Clearly a salary of £80,000 is more than decent, but anyone earning around this amount who has a mortgage to pay off or a family to support probably doesn’t consider themselves particularly wealthy.
“This presents a very real dilemma for Phillip Hammond and the Treasury as they prepare next week’s Budget. Cutting the annual allowance could undoubtedly raise valuable short-term revenue to help fill the £20billion NHS funding gap.
“In doing so, however, he would risk a backlash from trade unions across the public sector – including, ironically, those representing senior NHS employees.”
How a cut in the annual allowance could hit public sector workers*
|
Salary (£) |
Value of pension accrual tested against the Annual Allowance |
|
50,000 |
£13,333 |
|
55,000 |
£14,667 |
|
60,000 |
£16,000 |
|
65,000 |
£17,333 |
|
70,000 |
£18,667 |
|
75,000 |
£20,000 |
|
80,000 |
£21,333 |
|
85,000 |
£22,667 |
|
90,000 |
£24,000 |
|
95,000 |
£25,333 |
|
100,000 |
£26,667 |
|
105,000 |
£28,000 |
|
110,000 |
£29,333 |
|
115,000 |
£30,667 |
|
120,000 |
£32,000 |
|
125,000 |
£33,333 |
|
130,000 |
£34,667 |
|
135,000 |
£36,000 |
|
140,000 |
£37,333 |
|
145,000 |
£38,667 |
|
150,000 |
£40,000 |
*Accrual rates vary across public sector schemes. The table above assumes a 1/60ths accrual rate.
