The Chancellor has announced significant changes to pension tax relief for high earners in yesterday’s Budget.
At present most taxpayers are entitled to make tax relieved pension savings of up to £40,000 per year (gross). It is also possible to carry forward unused relief for up to three years.
Where, however, a taxpayer’s gross income exceeds £150,000 (known as “adjusted income”) that £40,000 entitlement is tapered at the rate of £1 for every £2 above that level so that, at a threshold income of £210,000, the annual allowance reduces to a minimum of £10,000.
Where a taxpayer’s adjusted income exceeds £150,000 but their “threshold income” (usually adjusted income less pension contributions) is less than £110,000 the tapering provisions do not apply.
These provisions have been criticised as providing a disincentive for certain workers (primarily NHS consultants and GPs) to work more hours. This is because the increase in value of their defined benefit pension schemes as a consequence of earning more causes them to exceed their annual allowance and can generate a tax charge that exceeds their additional pay.
The government has previously announced a couple of reviews of this topic, the second of which focused particularly on issues in the NHS. Ultimately, however, a solution has been pursued that impacts all high earners and not just those working in the health sector.
Two changes will take effect from 6 April:
1. Both the threshold income and adjusted income limits will be increased by £90,000 to £200,000 and £240,000 respectively. It is anticipated that this change will take many taxpayers out of the taper altogether. It should be noted, however, that the deemed rate of value accrual in many defined benefit pension schemes is such that even a restored annual allowance of £40,000 might not be sufficient to solve the problem for some medical professionals.
2. The minimum allowance will reduce from £10,000 to £4,000. This means that the ability of anyone earning in excess of £300,000 per year to make tax relieved pension contributions will reduce from the start of the new tax year. The carry forward provisions remain.
High earners should therefore consider their pension provision plans as soon as possible in order to be able to take appropriate action before 5 April. In particular taxpayers with incomes in excess of £300,000 may want to ensure that they have used up all available relief before the end of the tax year given the additional restriction on the relief to which they will be entitled after that date. Taxpayers with incomes of between £150,000 and £300,000 per year will have an unexpected opportunity to make more tax relievable pension contributions than anticipated.
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