By David Manning - Manager, Blockchain & Crypto Team While the title might seem dramatic, it is certainly the sentiment you will find across the array…
The budget has revealed a pending change to the pension taper. In short, the income level that triggers a reduced pension contribution allowance, has been increased. So more people can earn more money before restrictions apply – which is good news for any savers earning between £110,000 and £300,000. Those earning below £110,000 are unaffected by the changes.
Whilst the measure is announced as part of protecting the NHS in the Red Book and pre-budget it was rumoured that any changes could be specific to those in health sector, this has not transpired. There are no special provisions exclusively for Doctors, although the health sector is very much the target audience to (more or less) everyone’s benefit. Interestingly though, overall there is a modest cost to the measure which is funded by the NHS Immigration Health Surcharge.
The reasons for this are well known. Recent years have seen increased numbers of the most skilled & experienced medical professionals leave the NHS. GPs have been particularly scarce, as well as other often world leading specialists.
The country is now in the midst of the Coronavirus epidemic, and at the very time when the medical professionals within the NHS are most needed there is a shortage of expertise. Those that have had enough have left, and those that remain are over worked and under-resourced.
There are many reasons for this, and I won’t attempt to list them all here. However, a source of consistent irritation and – it must be said – the cause of a general sense of unfairness amongst GPs particularly, is the impact the current pension taper has on NHS Pension scheme members’ tax bills.
At present anyone earning £110,000 or more could potentially suffer a reduction in the amount they can save in to pension. Should the allowance be exceeded then beware – a tax charge applies.
This level of earnings captures most full time medics with the most exclusive expertise, such as GPs and surgeons. The way the NHS pension scheme works means that members have no control over the level of ‘pension input’ they make to the scheme. Unlike defined contribution schemes now common in the workplace, the NHS scheme (and other salary related schemes) assesses a level of year-on-year pension accrual for annual allowance – and tax charge – purposes.
What’s more, the level of pension input includes contributions (or accrual) made by both the individual and their employer, but any tax charge is payable by the individual. GP partners suffer a double whammy in this regard – because their ‘employer’ that is making the contributions is the practice they own. GP partners are both employer and member in this instance.
The situation became so dire that some medical professionals (and probably members of other defined benefit schemes, too) were left in the invidious position that increased working, meant an increased tax charge with no tangible benefit for the work undertaken. Any increased salary from increased hours was superseded by the tax charge payable because of the notional increased pension accrual.
Clearly something had to be done. The Government was never likely to encourage medical professionals to work more hours if it cost them for doing so!
The changes to the pension taper seek to do this. Now, no individuals will be impacted by the taper (and the associated tax charge) should they earn up to £200,000. This should provide some financial respite to many GPs and health sector experts, and presents an opportunity for high earners in all sectors too.
Further, no tax charge will apply if earnings and pension contributions/accrual together do not exceed £240,000.
This is not a utopia – even with a preserved allowance of £40,000 many NHS professionals will still be impacted by the annual allowance – but the hope is that these measures will remove at least some of the financial barriers preventing health professionals providing their services to the NHS.
It also presents an opportunity for those earning up to £240,000 to make full use of pension allowances and receive tax relief on any contributions made.
Pensions are designed to provide an efficient long term savings vehicle to allow the working population to prepare for the future. The Government has for some time encouraged workers to take responsibility for their own financial futures, and this rule change gives a little more scope for more people than ever to do so.
However, as with almost every relaxation of the tax rules, there is a sting in the tail. Those on the highest incomes will still be affected by the taper, and the restriction now goes further than ever reducing the annual allowance potentially down to just £4,000pa (gross). Those that earn £300,000 or more (or have combined income and pension input of this amount) will suffer a reduced annual allowance below the current minimum of £10,000, with those earning £312,000+ capped at the minimum £4,000pa.
The rules will take effect from the new tax year, commencing 6 April 2020.