Opinion Former Article

Budget 2020: Pensions tax announcement a welcome tonic for the NHS

The Chartered Institute of Taxation welcomes the Chancellor’s announcement that the ‘threshold income’ for triggering the rules on tapering of the pensions tax annual allowance will be increased from £110,000 to £200,000 with effect from 6 April 2020. A corresponding increase will be made to the ‘adjusted income’ from £150,000 to £240,000.  These changes respond to the adverse tax consequences for senior NHS clinicians of the existing rules whereby many have been materially disadvantaged in undertaking extra work which has taken them over the threshold income limit.

Tax relief on pension contributions is restricted by an annual allowance of £40,000 (although unused allowance can be carried forward for three years). This annual allowance is reduced (tapered) for those with an ‘adjusted income’ (i.e. income including pension saving) of over £150,000 but only where ‘threshold income’ (i.e. income excluding pension saving) is exceeded. So if an individual’s ‘threshold income’ exceeds £110,000 it is necessary to add together their income and pension saving to see if the £150,000 threshold has been exceeded. If so, the £40,000 annual allowance is tapered by £1 for every £2 that the individual’s adjusted income exceeds £150,000, i.e. from £40,000 to a current minimum of £10,000.

Colin Ben-Nathan, Chair of the CIOT’s Employment Taxes Committee, said:

“The Government are right to act in this area. With the current pressures on the NHS created by the coronavirus it is even more essential that perverse tax results do not lead to senior clinicians being disadvantaged from working extra shifts when they are most needed.

“The impact of the tapered annual allowance and resulting pensions tax charge on savings in excess of the tapered allowance in the NHS is well known. However, the tapering and resulting tax charge affect many other sectors as well, both in the public sector (fire, police, armed services, local government, etc) and private sector. It is right and sensible that these changes apply across the board.

“We therefore welcome the Chancellor’s announcement that with effect from 6 April 2020 the threshold income and adjusted income figures will both be increased by £90,000 to £200,000 and £240,000 respectively. These increases will come as a welcome relief to all those affected.”

At the same time the government has announced that the minimum tapered annual allowance will reduce from a base of £10,000 to £4,000.

Colin Ben-Nathan added:

“While the reduction in the minimum annual allowance will disappoint many higher earners looking to save for their retirement, we think it’s an acceptable quid-pro-quo for the increased threshold at which tapering begins to apply."

The CIOT notes that the changes on the ‘threshold income’ and ‘adjusted income’ represent a partial reversal of previous Budget announcements on tapering the annual allowance which complicated the pensions tax system, and that the associated cost will be £670 million pa by 2024/25.

The CIOT has also welcomed the promise of a call for evidence on pension administration to remedy the situation whereby some earning  around or below the level of the personal allowance and saving into a pension benefit from a tax top-up on their pension savings while others do not, dependent on how their pension scheme administers relief. The CIOT’s Low Incomes Tax Reform Group has long been campaigning for a resolution to this issue.

Notes for editors

1. Budget 2020 Red Book - https://www.gov.uk/government/publications/budget-2020-documents - at pages 42 and 89.

See also HMRC Policy paper - https://www.gov.uk/government/publications/pensions-tax-changes-to-income-thresholds-for-calculating-the-tapered-annual-allowance-from-6-april-2020.

2. “Net income” means your taxable income for the tax year, including earnings, pensions, savings, dividends, rental income etc, less any tax reliefs you are entitled to, such as pension contributions paid directly into a pension scheme (relief at source schemes).

“Pension savings” include the amount of pension contributions made by you or someone on your behalf, including your employer, during a relevant pension input period. This includes the uplift in the value of any defined benefits pension scheme.“Threshold income” means your net income for the tax year less any lump sum death benefits from pension schemes and adjusted for certain salary sacrifice and flexible benefit arrangements.

“Adjusted net income” means net income for the tax year less any lump sum death benefits from pension schemes plus your pension savings for the relevant period and including any tax relief on pension contributions paid directly into a pension scheme (relief at source schemes).

3. The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

Contact: Chris Young, External Relations Manager, 07900241584 cyoung@ciot.org.uk

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