Is it time to abolish the Tapered Annual Allowance?

In recent months, problems with pension allowances have
made national news. A particular area of concern has been the impact on NHS
staff, as it has emerged that the number of members leaving the NHS pension
scheme was five times higher than other public pension funds.

Issues with the controversial Tapered Annual Allowance
have caused many senior clinicians to refuse shifts or cut down on the number
of hours worked in order to avoid being hit with sizeable tax bills. In turn,
this has led to a shortage of doctors, cancelled appointments and a rise in
waiting times.

In their general election manifesto, the Conservatives
promised to fix the Tapered Annual Allowance issue. With a review expected in
the Budget, is it time to abolish the allowance altogether?

Tapered Annual Allowance – the issues explained

Introduced in 2016, the Tapered Annual Allowance reduces
the amount that higher earners can pay into a pension and benefit from the tax
advantages.

In the 2019/20 tax year, the Annual Allowance (the amount
you can save tax-efficiently in a pension) is limited to the lower of your net
relevant earnings or £40,000 per annum. This dictates how much tax relief you
can receive in a tax year.

However, if your ‘threshold income’ is more than
£110,000, or your ‘adjusted income’ is more than £150,000 you could be affected
by the Tapered Annual Allowance.

• Threshold income – your annual income before tax, less any personal pension contributions and ignoring any employer contributions
• Adjusted income – all income that you are taxed on, and this could include dividends, savings interest and rental income before tax, plus the value of your own and any employer pension contributions.

For every £2 your income exceeds the threshold, your annual allowance will
reduce by £1. The maximum reduction is £30,000, meaning that some workers can
be left with an Annual Allowance of just £10,000.

In cases where NHS clinicians agree to work additional shifts, they could
find their income passing the threshold level. This would reduce their Annual
Allowance and potentially increase the tax bill on their pension contributions.

Vince Smith-Hughes, Director of Specialist Business Support
at Prudential, says: “When the Tapered Annual Allowance was first being planned
no one made the immediate link to this impacting on the ability of the NHS to
provide essential expert medical attention, but that’s exactly what’s
happened. 

“A classic case of the law of unintended
consequences. Given that this may also impact on other essential
occupations, it feels like a review is long overdue.” 

Emergency measures put in place

In November, the government attempted to temporarily
solve the Tapered Annual Allowance issue.

They confirmed that tax bills incurred by senior NHS
staff this tax year will be covered by the NHS Pension Scheme under the ‘scheme
pays’ process. This allows individuals to pay tax charges of more than £2,000
through the pension fund without needing to find the cash.

Instead, a saver’s benefits are
adjusted at retirement and will pay interest, although the government say
that they will make good on any reduced pension before the doctors reach
retirement.

However, these emergency measures only cover the 2019/20
financial year and currently only apply to clinicians.

Is it time to abolish the Tapered Annual Allowance?

The unexpected consequences of the allowance have seen
many experts call for the Chancellor to scrap the taper entirely in his Budget
on March 11.

The British Medical Association (BMA) are one of the
organisations calling for the Tapered Annual Allowance to be abolished.

Vishal Sharma, Chair of the
BMA pensions committee, says: “The annual allowance is
fundamentally unsuitable for defined benefit schemes and we are doing all we
can to demonstrate to the government why removing the annual allowance,
including the taper in defined benefit schemes, is the only long-term
solution.”

Former Minister for Pensions, Ros Altmann, agrees. She
said: “Moving to a more transparent system with
a uniform amount that the government adds to each person’s pension
contributions – maybe 30p added for every £1 contribution – would be more
generous than basic rate tax relief, less than higher rate relief and much
easier to understand.”

However, abolishing the taper could be
politically difficult. This is because scrapping the taper would only affect
high earners, and not just those in the NHS pension scheme. In addition, the
Tapered Annual Allowance generated £1 billion of income in the last financial
year, scheduled to rise to £1.6 billion by 2023/24.

What experts believe is more likely is
that the threshold for the taper is likely to rise from £110,000 to around
£150,000. Proponents of this change have argued that such a solution would
solve the problem for most doctors, as consultants’ median earnings are
£112,000 and estimates suggest 90% would fall below this new limit.

Critics say that this would fail to
solve the underlying problem. Dr Sharma from the BMA adds: “Simply,
raising the threshold income would not remove any of the complexity of the
taper, nor the threat of doctors facing a ‘tax cliff’ when their income
increases through promotion or taking on additional work.

“Indeed, unless there is also an increase in the level
of adjusted income, this proposal would only make this ‘tax cliff’ steeper.”

Get in touch

The Chancellor is expected to announce the outcome of the
review into the Tapered Annual Allowance in his Budget on March 11.

If you have any questions about how the Tapered Annual
Allowance could affect you, or if you’re looking for pension advice, please get
in touch. Email info@depledgeswm.com or call (0161) 8080200.

Please note

A pension is a
long-term investment. The fund value may fluctuate and can go down, which would
have an impact on the level of pension benefits available. Your pension income
could also be affected by the interest rates at the time you take your
benefits. The tax implications of pension withdrawals will be based on your
individual circumstances, tax legislation and regulation which are subject to
change in the future.