There has been much talk in the financial press recently of proposed changes to the threshold for the tapered annual allowance from £110,000 to £150,000.
The taper was introduced in 2016 and gradually reduces the annual allowance for those on high incomes. For every £2 of adjusted income above £150,000 a year, £1 of annual allowance is lost.
It has proved unpopular as individuals in that earnings bracket can have their annual tax-free pension savings allowance reduced from £40,000 to as little as £10,000. They are also at risk of receiving a lifetime allowance tax charge on their benefits.
The situation gets confusing because it hinges on adjusted and threshold income. Adjusted income includes all pension contributions (including any employer contributions) while threshold income excludes them.
To make matters worse, HMRC start with ‘net income’ but do not just mean ‘income after tax’. In this context, they count all taxable income less various deductions, such as member contributions to an occupational pension scheme under the net pay arrangement.
The sponsoring employer of the pension scheme will deduct employee contributions before deducting tax under PAYE. These can be higher for many NHS workers compared with the private sector, as they are saving into a ‘defined benefit’ scheme.
This is why the taper threshold has caused particular problems for the medical profession. Many doctors have been forced to limit the work they do in an attempt to avoid significant charges on their pension. The system has reduced any incentive in accepting promotions and has encouraged many to consider early retirement.
As a result of the pension crisis in the NHS, the Treasury has outlined plans to address the taper and increase the tax relief. The average earnings for a consultant are £112,000 so an estimated 90% would fall under the new limit of £150,000.
However, representatives of the British Medical Association (BMA) state that the proposals do not go far enough and will in fact cause even more of a ‘tax cliff’. Just increasing the threshold will do nothing, they feel, to reduce the complexity of the taper.
Pension specialist, Helen Morrissey, calls for the taper to be scrapped altogether, describing the plan as a sticking plaster when major surgery is required.
It’s a topic to watch carefully. HMRC face a substantial decrease in revenue if they do make changes to the annual tapered allowance but the government has pledged to try and solve the crisis.