“The only clear path seems to be to abolish the root of the problem – the TPA. While finding the much-needed cash for the move will be a treasure hunt, if they don’t the health of the nation is at risk.”
It is not just those in advice circles calling for reform. Karen Goldschmidt, chair of the Association of Consulting Actuaries’ pensions taxation committee, described the allowance as “unutterably complicated, both for the individuals impacted and for pension schemes that carry much of the burden of trying to make the system work”.
Ms Goldsmith said she was hopeful that the latest consultation would offer a clear set of proposals: “The Treasury will know from the work it did in the last exploration of pension taxation, launched in 2015 – which led to no clear consensus – that there is a real challenge in coming up with a method of taxing the accrual of defined benefit pensions in a fair and practical way. We look forward to being able to feed in views.”
Hit them high
The government, upon introducing the TPA, could surely not have foreseen such a situation unfolding. Its objective was to squeeze pensions tax relief for high earners – defined as those earning in excess of £150,000 per year.
In one sense, the taper is in the same vein as Alistair Darling’s special annual allowance, which was unveiled in 2009. But although the special annual allowance shared some similarities – most notably that contributions were limited to £20,000 for incomes of £130,000 and above – it was far less complex than the TPA.
As things stand, the taper works as follows: an individual sees their standard annual allowance of £40,000 drop by £1 for every £2 of income above the £150,000 threshold. This means those who earn more than £210,000 in any given year have a reduced annual allowance of £10,000.
This is where the simplicity ends, in part due to the fact there are two tipping points to consider: those with threshold income above £110,000, and those with adjusted income exceeding £150,000.
Threshold income is defined as an individual’s net income for the year. This is effectively defined as ‘all taxable income’ such as total employment remuneration, pension income, dividends, interest, and so on. The amount of any taxable lump sum pension death benefits paid during the year in question can also be deducted.
But the complexity doesn’t stop there. If, after calculation, threshold income exceeds £150,000, then the individual must ascertain their adjusted income – including all employer pension contributions, to stop individuals from circumventing restrictions by swapping their salary for employer contributions – to work out their final TPA.