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Changes to the tapered annual allowance

Changes to the tapered annual allowance
  • Pedro Gonçalves
  • @PeterHSG
  • 23 March 2020
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Chancellor Rishi Sunak has made significant changes to the pensions annual allowance, including an increase to the annual allowance taper, in a bid to support high-earners working in the NHS. 

Sunak, who delivered his first Budget, revealed that the two tapered annual allowance thresholds will each be raised by £90,000. This means that from 2020-21 the "threshold income" will be £200,000, so individuals with income below this level will not be affected by the tapered annual allowance, and the annual allowance will only begin to taper down for individuals who also have an "adjusted income" above £240,000. 

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Currently, savers can benefit from tax breaks on what they pay into their pension, or how much their benefits can grow, up to a maximum of £40,000 a year. Savings that breach this limit are subject to tax charges at the same rate as the individual pays income tax. But those earning more than £110,000 are at risk of having their tax-free limit shrink from £40,000 to £10,000.

What was needed was sweeping simplification but what we got was more Treasury tweaking"

For those on the highest incomes, the minimum level to which the annual allowance can taper down will reduce from £10,000 to £4,000 from April 2020. This reduction will only affect individuals with total income (including pension accrual) over £300,000.

The move aims to reduce the likelihood of NHS workers being hit with large tax bills for saving into their pensions. 

Steve Webb, former pensions minister and partner at actuarial firm LCP, said: "Although raising the thresholds will substantially reduce the number of people affected by the tapered annual allowance, some higher earners are still at risk of being caught, especially if they get a promotion or take on additional responsibilities.

"What was needed was sweeping simplification but what we got was more Treasury tweaking."

Charles McCready, strategic policy director at The Investing and Saving Alliance's (TISA), said: "The increase of £90,000 to the pensions taper threshold will take 98 per cent of doctors out of scope of the tax.

"This will almost certainly help encourage more doctors to work longer hours, which is especially helpful at a time that COVID-19 is expecting to hit the NHS."

The measure comes after the British Medical Association and NHS leaders raised concerns with the Treasury about the impact of the tapered annual allowance on the health service.

The tapered allowance was introduced in 2016 to curb tax breaks given to higher earners on their pension contributions.

 

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