6th April 2020
In April 2018 our article ‘when pensions impact tax’ outlined some of the complexities of the pension system and the way in which these could impact on an individual’s tax position. In that article we highlighted the way in which high income individuals in the NHS pension scheme could be caught out either by the tapered annual allowance which was introduced in the 2016/17 tax year or by the lifetime pensions allowance.
A Government estimate was that this could potentially affect around a third of Consultants and GP Practice Partners. In order to avoid unexpected tax bills, some of those affected were responding by cutting working hours. Recognising the potential strain which this could place on NHS resources, the summer of 2019 saw consultations on alternative remedial proposals. This was followed by a temporary solution for the 2019/20 tax year being instigated by NHS England.
In his March 2020 Budget the Chancellor, Rishi Sunak, has taken steps to put a more permanent solution in place, essentially by raising the tax thresholds in respect of tapered annual allowance. So, with effect from the 2020/21 tax year individuals with a threshold income of between £110,000 and £200,000 and adjusted income between £150,000 and £240,000 will be able to fully use the £40,000 annual allowance without suffering a tax charge.
Those with incomes in excess of the adjusted threshold will continue to see their annual pension contribution allowance of £40,000 being reduced by £1 for every £2 of income over the adjusted income amount. For the current 2019/20 tax year this is subject to a maximum reduction of £30,000; ie down to £10,000. For the 2020/21 tax year the maximum reduction has been increased to £36,000; ie down to £4000. This means that higher earners, generally those earning in excess of £300,000, could see a detrimental effect on their tax position. The reduction in pension contribution allowance applies whatever the type of pension held including defined contribution and defined benefit pensions.
Thompson Jenner Partner Paul Carnell commented, “as we highlighted in 2018, pension tax calculations can seem simple but legislative complexities can catch out the unwary. NHS high earners aren’t the only individuals to be potentially affected by pension taper relief, highlighting the importance of effective tax planning. Please feel free to get in touch should you have any questions concerning the above or any other matters that were raised in the recent Budget.”