Chancellor Rishi Sunak’s first budget was a game of two halves, writes AJ Bell senior technical consultant Rachel Vahey.
The first was dedicated to coping with the creeping onset of coronavirus, and had obviously been written and re-written right up to the moment he stood up at the despatch box.
He unveiled a £30bn ($34.6bn, €32.1bn) package to help the UK ride out the coronavirus storm, including funds to support the NHS, extending statutory sick pay, and introducing support for smaller businesses with sick or self-isolating staff.
Then Sunak seemed to shift gears and returned to the ‘normal’ budget delivery. For pensions and savings, it was a relatively quiet budget, but one with a few significant announcements.
In the approach to budget day we had the usual rumours on the continuation of pension tax relief, although this year the idea of single rate of pension tax relief appeared to gain traction.
There was even talk of wholesale review of pension tax rules. But as 11 March approached events overtook these rumours and instead the focus was on the tapered annual allowance.
Quid pro quo
The Conservatives had promised in their election manifesto to review the tapered annual allowance and particularly how it affects NHS clinicians.
HM Treasury’s move to increase the two income thresholds by £90,000 went beyond mere tinkering.
However, the quid pro quo was the taper fell below £10,000 for those earning above £300,000, down to a minimum of £4,000.
From the 2020/21 tax year the tapered annual allowance income thresholds will be:
- Adjusted income (broadly taxable income plus employer pension contributions) – £240,000
- Threshold income (broadly taxable income less personal contributions) – £200,000
If an individual’s income is above these two thresholds, then their annual allowance will be reduced from £40,000 by £1 for every £2 their adjusted income exceeds £240,000, down to a minimum of £4,000 for anyone with an adjusted income of £312,000 and over.
| Adjusted income | Tapered annual allowance |
| £240,000 | £40,000 |
| £250,000 | £35,000 |
| £260,000 | £30,000 |
| £270,000 | £25,000 |
| £280,000 | £20,000 |
| £290,000 | £15,000 |
| £300,000 | £10,000 |
| £310,000 | £5,000 |
| £312,000 and above | £4,000 |
The new limits should help reduce or eliminate shock pension tax bills for NHS clinicians as well as private sector pension savers.
Case study – Karen and TonyKaren has taxable income of £145,000. Her employer pays £20,000 into a self-invested personal pension (Sipp) for her, and she contributes £10,000 a year personally. For the 2019/20 tax year, her adjusted income will be £165,000 and her threshold income will be £135,000. Her annual allowance will be tapered to £32,500. But, in the 2020/21 tax year, Karen’s income will not exceed the two thresholds, and she will receive the full annual allowance of £40,000. Her brother Tony has taxable income of £270,000. He is also building up a pension plan. His employer pays in £40,000. His adjusted income is £310,000 and in the 2019/20 tax year his annual allowance is tapered to £10,000, leaving him with a tax bill of £13,500 (45% of £30,000). Next tax year, under the new rules, his tapered annual allowance will be £5,000. The £35,000 above the annual allowance is added to earnings and taxed as income, leading to an annual allowance tax charge of £15,750 (£2,250 more than the previous tax year). |
Relief for doctors
This measure will cost the Treasury £180m in the 2020/21 tax year, rising to £670m by 2024/25.
Something worth noting is the new limits are introduced from the 2020/21 tax year.
Because of the mechanics of this tax measure, annoyingly many people don’t know what their tapered annual allowance will be until after the end of the tax year, and so unfortunately often after they have paid pension contributions.
These new limits won’t help those grappling with the tapered annual allowance over the next few months and facing a large tax bill.
However, those working for the NHS won’t feel the same pain.
In December last year, the health secretary Matt Hancock agreed to allow NHS England to make payments to senior clinicians to restore the value of their pension benefits package, if they have elected to use the ‘scheme pays’ facility to settle an annual allowance tax charge in the 2019/20 tax year.
While raising the thresholds will help those struggling with the taper, it is just a sticking plaster solution.
We would rather have seen the Treasury scrap the taper – as well as the unfair money purchase annual allowance (MPAA) – as part of a wider simplification agenda designed to make the system of tax rules governing people’s retirement savings easier to navigate.
This article was written for Interntional Adviser by Rachel Vahey, senior technical consultant at AJ Bell.
Vahey is also a member of the IA Tax Panel.
