Tax  

Could 2020 see the end of the taper?

Could 2020 see the end of the taper?

This year could signal the end of the controversial tapered annual allowance as the government has committed to an urgent review after the pensions industry called for its abolition.

The tapered annual allowance and the problems it caused have been one of the main concerns for the pensions industry throughout this year, with many calling on the government to solve these issues as a matter of urgency.

This came after it emerged 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.

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The taper has also caused many senior clinicians to retire early or cut down on the number of hours they work to avoid being hit with significant tax bills, which has led to a shortage of doctors.

Many in the industry have called on the government to address this issue as a matter of priority in 2020.

The government announced last month there will be an “urgent review” into the tapered annual allowance for pension tax relief and its effect on NHS staff. 

But this proposal has been criticised as “not urgent enough in a crisis”’ by Royal London director of policy and former pensions minister, Steve Webb.

Sir Steve said the solution was to abolish the taper outright, even if this meant a lower across-the-board annual allowance for all.

He said: “All year we have been hearing of doctors who are restricting their hours to avoid the risk of large lump sum tax bills. The tapered annual allowance is complex and makes it very hard for taxpayers to know where they stand.   

“What we do not need is another review, however ‘urgent’. There is a crisis in the NHS this winter, and to respond to this with a further review is to fail to grasp the urgency of the situation.”

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.

Vince Smith-Hughes, director of specialist business support at Prudential, said: “When the tapered annual allowance was first being planned no one made the immediate link to this impacting on the ability of the NHS to provide essential expert medical attention, but that’s exactly what’s happened. 

"A classic case of the law of unintended consequences. Given that this may also impact on other essential occupations, it feels like a review is long overdue.” 

In November, the government attempted to temporarily solve the taper issue by pledging to cover the tax bills of members of the NHS Pension Scheme who are in frontline clinical roles in England.

But these measures only cover the 2019/20 financial year and currently only apply to clinicians.