Concerns have been raised that proposals to increase the annual allowance taper threshold, expected to feature in next week's Budget, could lead to some individuals manipulating their earnings to bypass the rules.
FTAdviser's sister paper the Financial Times today (March 6) reported that chancellor of the exchequer Rishi Sunak is expected to raise the point at which tapering the annual allowance starts from £110,000 to £150,000.
This will give doctors and others greater clarity over whether they risk being hit by the taper.
Anyone whose income is greater than £150,000 will still be caught, but for those with an income of between £110,000 and £150,000 and with additional ‘income’ such as pension rights and investment income, it should now be easier to avoid the taper.
The taper gradually reduces the annual allowance for those on threshold incomes of £110,000 and adjusted incomes of £150,000 to £210,000, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.
It means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.
Tom McPhail, head of policy at Hargreaves Lansdown, warned a hike of threshold could result in more individuals being able to manipulate their income to bypass the tax rules.
People such as business owners could suppress their income to below £150,000 and take additional benefits in kind such as top up pension contributions from the business.
Mr McPhail said: “The proposed change is a bit of a sticking plaster solution, it will make it easier to plan income, pensions and tax liabilities for some high earners but the government really needs to tackle a more fundamental review of pension taxation to address the myriad other problems with the system.
“We also think the proposed solution could possibly lead to some situations where people could manipulate their income and pension remuneration packages to circumvent the rules.”
Others have said while the Chancellor's comments showed progress, they did not go far enough to address the issues high paid doctors are facing.
Rachael Hall, head of medical services at Sandringham Medical Financial Planning, said: “Moving the threshold income from £110,000 to £150,000 is progress, as it will remove a significant number of people from the taper tax trap, restoring their annual allowance back to £40,000 - but the tax on ambition still remains.
“Many members have no unused allowances to carry forward anymore, so it’s still likely that they will incur some level of charge in future years, especially when moving up through the pay scales.
“What we need is full pension reform, as this system is still infused with complexity and can disincentive people to save into pensions, as evidenced by the upward trend in the rate of opt outs. DB pensions will always be the superior pension contract, so we need to protect these schemes for future generations.”
Tom Selby, senior analyst at AJ Bell, called raising the point at which the taper kicks-in from a “half-baked solution which fails to address the core problem”.
He added: “It would make much more sense to simply scrap the taper as part of a wider simplification agenda designed to make the system of tax rules governing people’s retirement savings easier to navigate.
“As well as ditching the taper, the Treasury should also consider doing away with the poorly understood money purchase annual allowance and returning to a framework where tax relief costs are controlled by just a single annual and lifetime allowance.
“This would at least give savers a fighting chance of understanding how much they can pay into their pensions.”
Ian Macvie, pensions and retirement planning technical manager at Wesleyan, said: “We expect that many consultants will come under this new proposed threshold, giving at least some hardworking doctors and clinicians much needed headroom.
“However, simply raising the taper threshold doesn’t go far enough in our view. The fundamental issue is the taper itself as it is unfair, not fit for purpose, and should be scrapped immediately.
“Until then, work-arounds that only change its parameters are unsatisfactory solutions, and we’ll continue to see cases of front-line clinical staff limiting their hours or leaving the NHS to protect their own financial health.”
amy.austin@ft.com
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