• Reports today suggest the Treasury wants to raise the point at which the annual allowance taper for high earners kicks-in (https://www.thetimes.co.uk/edition/news/pension-tax-windfall-for-top-earners-kzclkkg76)
• Under current rules, anyone with ‘threshold’ income above £110,000 and ‘adjusted’ income above £150,000 has their annual allowance reduced
• Ministers have reportedly drawn up plans to raise threshold income to £150,000, a move likely to ease the risk of senior doctors being hit with huge pension tax bills
• Unclear whether solution is viewed as an end solution by the Treasury to deal with NHS capacity issues or the beginning of a wider reform programme
Tom Selby, senior analyst at AJ Bell, comments:
“Raising the point at which the pension tax taper kicks-in by £40,000 would help reduce or eliminate shock pension tax bills for a large number of high earners, including senior consultants in the NHS.
“However, the problem with the taper isn’t just the point at which it takes hold – it is the fact that, because things like overtime make earnings levels far from certain, many people will have no idea if or to what extent they will be affected.
“When you combine that uncertainty with the mind-boggling complexity of calculating the taper, particularly in relation to defined benefit (DB) schemes, it is far from clear that simply raising the point at which it takes effect will be enough to stop doctors refusing shifts.
“We also don’t yet know whether this is viewed as the final solution to the NHS pensions crisis by the Treasury, or the beginning of a wider programme of pension tax reform. The optics are certainly tricky as this move alone hands more tax relief to higher earners, while failing to remove the mind-boggling complexity created by the taper.”
The case for radical simplification
“If this is just a sticking plaster solution, we hope the next step will be for the Chancellor to consult on a far wider, more radical pension tax simplification agenda. Ideally this should focus on building on the success of automatic enrolment and encouraging more people to save for their futures – something which the current complexity acts as a barrier to.
“Our preferred solution would see the taper and the poorly understood money purchase annual allowance scrapped at the earliest possible opportunity, meaning pension tax costs would be controlled by a single annual allowance and the lifetime allowance.
“Beyond this, there are strong arguments in favour of controlling DB costs through the lifetime allowance alone, with defined contribution (DC) schemes, where the vast majority are now building their retirement pots, controlled by the annual allowance. This would radically simplify the system people are being asked to engage with.”
In brief: How the pension tax 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.
You can read our guide and examples of how the taper works here: https://www.youinvest.co.uk/sites/default/files/AJBYI_Guide_to_annual_allowance_tapering.pdf
