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21 January, 2020   |   By Intelligent Pensions   |   Market News

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Potential Changes to the Tapered Annual Allowance

The Tapered Annual Allowance came into effect on 6 April 2016 and impacts the ability of high earners to pay pension contributions.

The Tapered Annual Allowance applies to anyone with ‘adjusted income’ over £150,000 unless ‘net income’ is less than £110,000. In this context ‘net income’ is not net of tax income.

‘Adjusted income' is income without deducting your own pension contributions plus the value of any employer pension contributions.

Where the Tapered Annual Allowance applies, the £40k Annual Allowance is cut by £1 for every £2 ‘adjusted income' over £150,000 in the tax year. The maximum Annual Allowance reduction will be £30,000, so if ‘adjusted income’ is over £210,000 an Annual Allowance of £10,000 will apply.

You can carry forward any unused Annual Allowance and the balance of the reduced Annual Allowance can be carried forward.

The tapered Annual Allowance works by imposing an additional tax charge which is designed to recover the tax relief already earned on the excess contributions, meaning that anyone who inadvertently exceeds their reduced (tapered) Annual Allowance will face an unexpected tax bill.  

There has been press speculation that the Treasury is looking at raising the threshold for the Tapered Annual Allowance, from £110,000 to £150,000.  This is due to the impact it is having, in particular on NHS doctors, as the effected individuals are reacting by reducing their hours or retiring early, with the unintended consequence being a shortage of doctors

Fiona Tait our Technical Director provided the following comments to the media on this subject:

“It is important to realise that these tax bills are not just a problem for the NHS, although it is only there that the impact has been felt by the average person. The issue is one of over-complexity and ill-conceived tinkering with the pension tax relief regime.

"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. The whole intention of pensions simplification in 2006 was to get rid of the complexity and manage costs via two simple allowances, and I can see no reason why we cannot return to that aim. 

“Since 2006 there has been progressive tinkering with the rules based on short-term objectives, which have put us back to a position where tax relief is almost impossible for most people to follow and has resulted in a number of unintended consequences such as the impact on the NHS. Such a review would allow the Government to look at ways of recouping the revenue lost by the abolition of the taper and making the system fairer and more sustainable at the same time.

“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 following articles used Fiona’s comments and can be found here:

 

https://www.ftadviser.com/pensions/2020/01/16/tapered-annual-allowance-solution-dismissed-by-experts/?page=2

https://corporate-adviser.com/taper-rumours-spark-widespread-criticism/

https://www.yourmoney.com/retirement/pension-tax-break-for-higher-earners-considered-by-treasury/

https://www.professionalpensions.com/news/4009195/treasury-looks-raise-tapered-allowance-gbp150

http://www.actuarialpost.co.uk/article/potential-changes-to-the-tapered-annual-allowance-17732.htm 

https://www.professionaladviser.com/news/4009183/treasury-plans-tackle-nhs-pension-taper-woes-widely-criticised