Pension tax break for higher earners considered by Treasury
The Treasury is reportedly considering raising an income threshold used to calculate pension tax relief levels which should help reduce tax bills for higher earners.
A report in The Times suggests that the Treasury is looking at raising the threshold for the unpopular and confusing tapered annual allowance which came into effect in 2016.
The taper affects higher earners with an ‘income’ of £110,000 or more. Usually, people are able to put up to £40,000 into a pension tax-free with contributions above this amount being subject to a saver’s marginal income tax rate.
But this annual allowance and the subsequent tax relief is whittled away the more people earn and the more an employer contributes into their pension. In the worst-case scenario, a saver could be left with an annual allowance of just £10,000 and face a tax bill of £13,500.
These large tax bills have been criticised and highlighted by senior consultants working in the NHS. They claim they’ve been forced to cut their working hours to avoid surprise tax bills which means longer patient waiting times.
Tapered annual allowance summary and reported changes
For higher earners, the annual allowance is reduced by £1 for every £2 above an ‘adjusted income’ of between £150,000 and £210,000. This includes taxable income, employer contributions and contributions made via salary sacrifice.
However, if your salary is below £150,000, you could also be impacted as the government applies a ‘threshold income’ test. It includes pension income as well as dividends and property rental income.
The report in The Times suggests The Treasury is considering increasing the threshold income from £110,000 to £150,000 to avoid adding to the NHS crisis.
Fiona Tait, technical director at Intelligent Pensions, said: “It is important to realise that these tax bills are not just a problem for the NHS. The issue is one of over-complexity and ill-conceived tinkering with the pension tax relief regime.
“An increase in the threshold will mean fewer people are impacted by the taper but probably won’t remove the complexity for those who are. This issue really came to light when NHS doctors were shocked to discover they were financially worse off by working overtime. However, I have no doubt there will be many doctors who will be impacted at the £150,000 threshold so is this really ‘problem solved’ or just goalposts moved?”
“The obvious and most popular action would be to simply abolish the taper, and to call for a wider review into pension tax relief in general.”
Helen Morrissey, pension specialist at Royal London, said: “While this news will be good for some in reality it is further evidence of HM Treasury choosing to tinker at the edges rather than tackle the source of the problem which is that the taper must be scrapped. In short this is like using a sticking plaster in place of major surgery – we need reform of pension tax relief.”