Spending review could fix pension tax problem

Spending review could fix pension tax problem

The government’s spending review, which will take place next week, could include changes to pension tax allowances, experts have predicted.

Tom Selby, senior analyst at AJ Bell, noted the Boris Johnson administration appeared keen to distance itself from former chancellor Phillip Hammond, and his successor Sajid Javid could use his first major speech to bring about something his predecessor did not.

AJ Bell is expecting key spending announcements in popular areas in a bid to win over voters as part of a warm up to a much-anticipated general election.

This is despite Mr Javid saying there would be no "blank cheque" for departments in his spending review on September 4, and that he will stick to the current borrowing rules, which would limit the scope for extensive increases in spending.


Mr Selby noted that the tapered annual allowance could be an area of focus for HM Treasury.

He said: “The impact the taper is having on high-earning public sector workers – and particularly those in the NHS – has been well-documented, and [Mr] Javid recently confirmed the Treasury would ‘review how the tapered annual allowance supports the delivery of public services such as the NHS’.”

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 charge 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.

It emerged in December that the number of members leaving the NHS Pension Scheme was five times higher than that seen by other public pension funds, most likely because of the taper on the annual allowance.

The Treasury announced a review of the tapered annual allowance in August after doctors were campaigning to scrap it for months.

This was as part of a further consultation on the rules of the NHS Pension Scheme, which will soon be published and replace the document published in July.

Mr Selby added: “While pension tax policy should be designed for the long-term, the short-term pressures facing UK hospitals require rapid action.

"Scrapping the taper would be the simplest option, although the exchequer would need to find around £1bn a year to cover the cost.

“Once the government emerges from its Brexit bunker, a wider review of the pension tax system, with the central aims of simplifying the rules and encouraging more people to save for retirement, is long overdue.”

Steven Cameron, pensions director at Aegon, agreed with this view. 

He said: "The government will want to stop the current drain of highly valuable expertise from the NHS but also needs to avoid special treatment for one particular employment.

"Removing the taper for NHS employees and others will cost the government in terms of lower income tax receipts, and the spending review may set out how this will be funded.”