The Treasury’s TAA proposals: Arranging the deck chairs?
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The Treasury is reportedly planning to raise the point at which the annual allowance taper kicks in, called the threshold income, to £150,000 from currently £110,000
The tinkering, revealed by the Times, follows months of complaints by doctors, many of whom say they make a financial loss by working overtime, as this triggers a higher tax bill. As a result, NHS hospitals are currently suffering from a shortage of senior clinicians.
The tax affects those on high salaries who also have a defined benefit pension, as it takes both income and pension savings into account. Under current rules, the annual allowance is reduced by £1 for every £2 of adjusted income above £150,000 if their threshold income is over £110,000.
The Department of Health and Social Care previously consulted on an option whereby NHS scheme members could choose to accumulate less for a lower pension, which was immediately rejected by the British Medical Association.
The BMA has instead called for scrapping the tapered annual allowance, along with many in the pensions industry who say the tax is unnecessarily complex, but the Treasury has shown no sign of giving in to this call.
Irregular working hours make tax planning tricky
Raising the point at which the pension tax taper starts by £40,000 would help reduce or eliminate shock pension tax bills for a large number of high earners, said senior analyst at platform provider AJ Bell, Tom Selby.
“However, the problem with the taper isn’t just the point at which it takes hold – it is the fact that, because things like overtime make earnings levels far from certain, many people will have no idea if or to what extent they will be affected,” he added.
He called the proposal “a sticking plaster solution”, saying a far wider and more radical pension tax simplification should be consulted on. Selby wants to see the tapered annual allowance scrapped, together with the money purchase annual allowance, and replace them with a single annual allowance and a lifetime allowance.
For Fiona Tait, technical director at Intelligent Pensions, “the issue is one of over-complexity and ill-conceived tinkering with the pension tax relief regime”.
She also called for the taper to be abolished and a wider review to be initiated.
“The whole intention of pensions simplification in 2006 was to get rid of the complexity and manage costs via two simple allowances, and I can see no reason why we cannot return to that aim,” she said.
While an annual allowance for tax relief had been introduced in 2006, the taper was added by David Cameron’s government and came into effect in April 2016. His chancellor George Osborne also reduced the lifetime allowance several times, from £1.5m to £1m. It currently stands at £1,055,000.
Tait criticised that raising the threshold income for the annual allowance taper does not do anything to address complexity.
“An increase in the threshold will mean fewer people are impacted by the taper but probably won’t remove the complexity for those who are,” she said.
She questioned whether it would change much for doctors in particular: "I have no doubt there will be many doctors who will be impacted at the £150,000 threshold, so is this really ‘problem solved’ or just goalposts moved?”
What do you think about the Treasury’s latest proposal?
