Rumoured Treasury plans to address the tapered annual allowance (TAA) issue by increasing the threshold from £110,000 to £150,000 have been described as ‘naïve’, pointless tinkering and blind to the inequalities in the current tax relief system.
The Times has reported that the TAA could be raised in the March budget to reduce the impact of tax charges on NHS consultants, but would also benefit other highly paid staff.
Under current rules people earning less than £110,000 are not impacted by the TAA. But those above £110,000 have to check whether their adjusted income is over £150,000 and for those who do exceed this limit, their annual allowance is reduced by £1 for every £2 in excess of £150,000, down to a minimum annual allowance of £10,000.
Garry Graham, Prospect deputy general secretary, responding to today’s Times splash on possible changes to pension tax, said:
“Prospect welcomes reports that the government is seeking to solve this issue not just for doctors but for leaders and senior professionals across the public sector.
“The reported proposals outline a change in the thresholds of the tapered annual allowance which would ensure that the policy affects people who genuinely earn more than £150,000. This will mean the taper will rightly affect high earners such as bankers without affecting doctors, air traffic controllers and chief fire officers.
“That said, the government does need to take action to remedy the imbalance in the benefit of tax relief between those on the highest and lowest earnings. We urge government to tackle anomalies that see the lowest earners unfairly not receiving any tax relief on their pension contributions.”
Baroness Altmann says: “Rumours that the Government has proposed just tweaking the thresholds for its damaging TAA pension rules would not solve the problems caused to our beloved NHS by pension tax penalties on the most senior staff. Raising the threshold of earnings at which the TAA cliff-edge bites, from £110,000 to £150,000 adjusted earnings, will certainly not relieve the concerns that have caused an NHS staffing and operational crisis.
“The taper rules should be abolished: The current rules are unreasonably complicated and unpredictable for a number of reasons. For example, the reduced Annual Allowance which triggers unexpected tax charges is based on current year’s earnings – and it does not use the actual monetary contributions paid into the pension scheme. The pension contribution is based on notional growth in the value of the final pension in future, so most non-pension experts would not know how much HMRC will assume they have ‘contributed’.
“It is true that those facing tax charges can ask their pension scheme to pay the Bill (although not in all cases) but the Scheme Pays option is still punitively expensive in their eyes because it amounts to borrowing the money from their future pension and being charged a high interest rate on that loan. So they still seem to feel the safest thing to do, especially if they do not have detailed financial advice, would be to avoid extra shifts just in case there is a problem.”
Quilter retirement expert Ian Browne says: “When it comes to policy changes one of the biggest problems we face is knee jerk decisions to fix an issue, and what’s even worse is a slow motion knee jerk. A report from the Association of Consulting Actuaries flags the need for a collaborative review of pension taxation, something echoed by The Fabian Society and Bright Blue who are calling for a new cross-party pension commission. This seems like common sense, but apparently it is something that still needs to be said. As we edge towards the March budget rumours are already circulating about reforms to pension taxation and the most recent ones say Government are considering upping the threshold income for when someone has to pay the annual allowance from those earning more than £110,00 to £150,000.”
“While this would numb the problem currently crippling the NHS pension scheme, which has garnered strong media attention, ultimately the system is still flawed. It does not cure the problem plaguing the NHS and other high earning professions. The pension taxation system is unnecessarily complicated and broken. More tinkering will make that worse.
“Policy makers shouldn’t be naïve. While the taper was one of the original issues for the NHS pension scheme, the resultant scrutiny of how the NHS Pension and Annual Allowance works has definitely opened the eyes of some doctors. They are now aware of flaws in the system such as overly complex calculations, paying taxes on pension benefits that never manifest, negative pension input amounts that get zeroed in HMRC’s favour, interest from HMRC on ‘late’ tax payments caused by the scheme not providing the right information at the right time.
“The pension taxation system needs a wholesale independent review.”
Intelligent Pensions technical director Fiona Tait says: “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?”