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 firstname.lastname@example.org or call (0161) 8080200.
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.