One of the headline announcements of the chancellor’s statement concerned changes to the controversial annual allowance taper – a feature that steadily reduces the tax-free amount individuals can save into their pensions as they earn above certain thresholds.
In a move that aims to support senior NHS clinicians and other higher earners with unexpected tax bills, Rishi Sunak has raised the taper’s threshold income by £90,000, from £110,000 to £200,000.
In his address to parliament, Mr Sunak claimed that 98 per cent of consultants and 96 per cent of GPs will no longer be affected by the new rules.
The change means that, from the 2020-21 tax year, individuals with an income less than £200,000 will not be affected by the taper.
The £40,000 annual allowance will only start to taper down when an individual’s adjusted income – effectively their threshold income plus the value of their pensions savings – exceeds £240,000.
In the Budget, the chancellor also lowered the minimum level to which the annual allowance can reduce, from £10,000 to £4,000.
This change will only impact those whose total income – when total pension accrual is taken into account – is more than £300,000.
Under the current rules, higher earners whose adjusted income is greater than £150,000 a year are subject to the tapered annual allowance.
The impact of these complex rules has been felt in the NHS, where many doctors can have high earnings and build up significant pension benefits.
This has resulted in some doctors receiving high tax bills or seeing their future pension benefits reduced, which in turn has made some reluctant to take on additional overtime.
Others have been deciding to retire early to try to avoid tax penalties.
A lifeline for the NHS?
Anything that reduces the likelihood of individuals in the NHS being hit with large tax bills for saving into their pension is a good thing.
Calculations around the annual allowance and taper are very complex and, as a measure to address the impact of the tapered annual allowance on the NHS, the chancellor’s move is a big step in the right direction.
We expect that the vast majority of consultants will now come under this new threshold, giving most hard-working doctors and clinicians much needed headroom.
However, simply raising the taper thresholds does not go far enough in our view.
The fundamental issue is the taper itself as, in our view, it is unfair, not fit for purpose, and should be scrapped – especially now the thresholds are so high, they will only affect a small minority of exceptionally high earners.
It would be fairer to simply scrap the tax.
Workarounds that only change the taper’s parameters are unsatisfactory solutions, and we will continue to see cases of frontline clinical staff limiting their hours or leaving the NHS to protect their own financial health.
The fact that the people affected by these tax charges are at the upper end of the NHS pay scales demonstrates their highly valuable expertise in the clinical field – the very people whose medical knowledge and skill the NHS can ill afford to lose.