Next week’s Budget will change the pension tax rules, according to reports,to ensure doctors — and other higher-paid public sectors workers — aren’t hit with tax bills for overtime.
The Financial Times is reporting that the chancellor, Rishi Sunak will raise the earning threshold at which annual allowance taper relief kicks in. This will rise from £110,000 to £150,000.
At present most people can put £40,000 into a pension and get tax relief at their marginal rate. However, the annual allowance taper reduces the amount that can be saved into a pension for higher earners. Currently those earning £210,000 or more can only save £10,000 into a pension.
This taper can apply once earnings hit £110,000. At this point individuals are assessed, and their income is added to their investment income and pension contributions received from their employer.If this total exceeds £150,000, then their annual allowance starts to reduce.
If overtime pushes an individual’s earnings into this zone, they can be hit with a tax bills for pension payments already made on their behalf. This has resulted in number of consultants and doctors in the NHS turning down additional shifts, or retiring, to avoid large tax bills, in some cases running into six figures.
While the government has previously stated it will address this issue, the matter has become more critical with fears of a coronavirus epidemic in the UK, which is likely to increase working hours for healthcare professionals.
Aegon’s pension director Steven Cameron said he welcomed this change but called for more radical simplification of the tax rules on pensions.
He says: “Pensions experts have been calling for this to be scrapped, along with an increase to the Lifetime Allowance, which is the maximum that can be held in a pension on a tax favoured basis.
“The latest from Whitehall is that removing the taper would be too costly but instead, the threshold when it kicks in will be raised. This may reduce the number of higher paid individuals who face a tax penalty, but the rules are highly complex, and many individuals will still fear being caught out.”
Hargreaves Lansdown head of policy Tom McPhail says: “The proposed change is a bit of a sticking plaster solution, it will make it easier to plan income, pensions and tax liabilities for some high earners but the government really needs to tackle a more fundamental review of pension taxation to address the myriad other problems with the system.
“We also think the proposed solution could possibly lead to some situations where people could manipulate their income and pension remuneration packages to circumvent the rules.”
AJ Bell senior analyst Tom Selby says raising this threshold by a modest amounts “feels like a half-baked solution” which fails to address the core problem.
He called for a widespread review of pensions taxation: “The Treasury’s apparent attachment to the hideously complex annual allowance taper is damaging both to the NHS and the wider pension tax regime.
“It would make much more sense to simply scrap the taper as part of a wider simplification agenda designed to make the system of tax rules governing people’s retirement savings easier to navigate.
“As well as ditching the taper, the Treasury should also consider doing away with the poorly understood ‘money purchase annual allowance’ and returning to a framework where tax relief costs are controlled by just a single annual and lifetime allowance.
“This would at least give savers a fighting chance of understanding how much they can pay into their pensions.”