Hundreds of thousands of higher earners look set to receive a tax boost on their pension contributions under measures to be unveiled in the Budget.
Rishi Sunak, the chancellor, is next week expected to announce a change in pension tax rules which will allow those earning more than £110,000 a year to pay more into their pensions and benefit from tax relief.
Currently, savers can benefit from tax breaks on what they pay into their pension, or how much their benefits can grow, up to a maximum of £40,000 a year. Savings that breach this limit are subject to tax charges at the same rate as the individual pays income tax.
But those earning more than £110,000 are at risk of having their tax-free limit shrink from £40,000 to £10,000.
The Budget, however, is expected to raise this threshold from £110,000 to £150,000, meaning fewer are at risk of tax charges for allowance breaches.
Mr Sunak’s move aims to address concerns about the impact of the so-called annual allowance taper on the NHS. Thousands of senior doctors have been turning down extra work that will put them at risk of six-figure pension tax bills.
“By raising the threshold for testing whether the taper applies from £110,000 to £150,000, doctors (and others in a similar position) will have greater clarity over whether they risk being hit by the taper,” said Tom McPhail, head of policy with Hargreaves Lansdown, the investment manager.
“Anyone whose income goes over £150,000 will still be caught, but for those in no-man’s land with an income of over £110,000, below £150,000 but with additional ‘income’ such as pension rights and investment income which could tip them over £150,000, it should now be easier to avoid the taper.”
Hargreaves Landown estimates the rise in the taper threshold from £110,000 to £150,000 would mean an individual with taxable earnings of £115,000, adjusted income of £180,000, and pension accrual of £65,000, would see their tax bill reduce by £6,000.
The measure comes after the British Medical Association and NHS leaders raised concerns with the Treasury about the impact of the tapered annual allowance on the health service.
The tapered allowance was introduced in 2016 to curb tax breaks given to higher earners on their pension contributions.
How does the taper work?
Currently, once someone’s income exceeds £110,000, they are assessed to see whether they are subject to the annual allowance taper.
Their earned income is added together with their investment income and any pension contributions they receive from their employer.
If this total exceeds £150,000, then their annual allowance is reduced, at a rate of £1 for every £2 earned, until they hit an income of £210,000. At this point their annual allowance is £10,000 a year.
However, complex rules around the operation of the taper have meant that doctors earning more than £110,000 and doing additional hours, or taking on promotions, have been landed with substantial tax charges for breaching their tapered annual allowance.
The only method many senior doctors have had to control the risk of taper tax bills has been to turn down additional work, putting pressure on the NHS.
Pensions experts said the Budget measure would not solve the problems of the taper for high earners saving into defined benefit-style pension schemes such as the NHS, where it is much harder to predict how much pensions will grow each year.
“The structure of schemes like the NHS pension means it is impractical to revise down contributions to avoid the tax penalty, and workers are often choosing to cut their hours instead,” said Graham Crossley, head of development in the dental and medical division at Quilter Financial Advisers.
“It’s likely that the thinking behind this move is that the taper tinker will move the cliff edge away for most doctors. However, this is adding complexity to an already overcomplicated system.”
Michael Martin, head of the private client team at 7IM, said: “It’s not the tax that’s the problem with the pensions taper, it’s working out the tax bill.
“They say there’s only one thing worse than a tax bill, and that’s getting an unexpected one. The way the taper is applied, you can’t work it out and plan your finances around it.”
— to www.ft.com