Pensions experts have criticised a rumoured government policy to raise the tapered annual allowance threshold income, calling it a sticking plaster that will not solve the underlying problem.
According to The Times, Treasury officials have discussed raising the tapered annual allowance threshold income from the current £110,000 to £150,000, a level at which pension contributions are counted as earnings and lower tax-free allowances start to kick in.
It was argued that such a solution would solve the problem for the majority of doctors, which have been turning down additional work for fear of large tax bills, since consultants’ median earnings are £112,000 and it is estimated that 90 per cent would fall below the new limit.
This solution would not be exclusive for National Health Service pension fund members, and would be applied to all taxpayers.
The way the taper is designed needs to be thoroughly reformed as it does not provide people, especially in defined benefit schemes, with any certainty
Baroness Ros Altmann
Introduced in 2016, the tapered annual allowance gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax on their benefits.
The taper means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.
This adjusted income is calculated by adding the threshold income to the value of pension savings. The taper applies to individuals who have a threshold income – the gross income minus any tax-relievable contributions such as pension contributions – above £110,000.
Solution could worsen the problem
The British Medical Association, which has been campaigning for the tapered annual allowance to be scrapped, has already criticised the proposal.
Dr Vishal Sharma, BMA pensions committee chair, said: “Simply raising the threshold income would not remove any of the complexity of the taper, nor the threat of doctors facing a ‘tax cliff’ when their income increases through promotion or taking on additional work.
“Indeed, unless there is also an increase in the level of adjusted income, this proposal would only make this tax cliff steeper.”
Former pensions minister Baroness Ros Altmann also argued that merely raising the threshold of earnings at which the tapered annual allowance starts “will certainly not solve the underlying problem”.
She said: “The way the taper is designed needs to be thoroughly reformed as it does not provide people, especially in defined benefit schemes, with any certainty. They still won’t know in advance whether their extra earnings and pension accrual might trigger a huge tax charge.”
Baroness Altmann noted that doctors consider scheme pays – which allows them to settle annual allowance tax charges of more than £2,000 through the NHS scheme without needing to find cash up front, having benefits adjusted instead – to still be an expensive work-round.
“In their eyes the safest thing to do, unless they have detailed financial advice, would be to avoid extra shifts just in case there is a problem,” she added.
In November, it was announced that the government would make good on any reduced pension for those who use scheme pays before the doctors reach retirement, effectively covering the tax bills for 2019-20.
A ‘sticking-plaster approach'
Tom McPhail, head of policy at Hargreaves Lansdown, argued that raising the taper threshold “would be a sticking-plaster approach, when more radical surgery is needed”.
He said: “The government should grasp this opportunity to implement bold reforms to the overall tax structure of pensions.”
However, there are positive aspects of this solution, noted Steven Cameron, pensions director at Aegon.
Govt solution for doctors’ tax bill met with criticism
The government will introduce an emergency measure to pay the tax bills of doctors and consultants in England affected by the tapered annual allowance, but the move has been criticised by experts.
“It is a positive sign that the government is looking for a solution and is prepared to apply it to all individuals, not only doctors,” he said.
“It would be hugely complex and not sustainable to have different rules according to professions.”
Mr Cameron would prefer the Treasury to announce a new pension tax relief review and consultation in the next Budget, which will be delivered on March 11, instead of a radical solution, since the pensions industry’s input could really help this discussion, he added.
The Treasury declined to comment on this matter.
