Julie Sebastianelli examines Chancellor Rishi Sunak’s plans to help NHS doctors avoid the unintended tax trap caused by the Tapered Annual Allowance rules.
High earners were given a double boost in the Chancellor’s March budget firstly in that higher rate tax relief remained untouched and secondly in that changes to the hated tapered annual allowance open the door for higher levels of contributions.
In July of last year, I wrote a piece highlighting the plight of senior NHS staff who, though a cruel twist of circumstances could actually pay more tax than they earned through overtime and extra shifts. This was as a result of earnings which reduced their individual pension annual allowance and in turn triggered a tax charge on the calculated pension inputs to their defined benefit pension schemes.
Although a much wider review of the complex pension legislation had been called for, the Chancellor has simply addressed this single issue in his March 2020 budget by raising both the Threshold Income and Adjusted Income by £90,000 each from 6th April 2020.
The good news is that the solution to take doctors out of this unintended tax trap (and the Chancellor estimates this move will be beneficial to 98% of NHS consultants) applies across the board to everyone. Any client whose earnings previously exceeded £110,000 whether they are a member of a defined benefit or defined contribution pension scheme could potentially pay higher contributions for the tax year 2020/21 onwards.
The table below shows the effect on the change on the Annual allowance as Adjusted Income rises between £150,000 and £300,000. The flip side of the new limits is that those earning £312,000 a year will see their Annual Allowance drop to £4,000 which in effect makes saving additional amounts in a pension scheme redundant.
The carry forward of allowance rules remain unaltered so it will still be necessary to collect total income data for clients in each tax year even if maximum contributions are not being made in case they can be made good in subsequent years. Bearing in mind the higher rate income tax rate of 45% applies for earnings in excess of £150,000 an opportunity window exists to top up pensions for higher earners at least until such times as a wider review of pension is undertaken.
In all circumstances before contributions are made, suitable advice should be obtained to ensure relief will be available and Lifetime Allowance limits or protections are not being endangered.
To find out more on this subject visit www.hurleypartners.co.uk or contact Julie Sebastianelli at Hurley Partners on 020 8936 3970/0161 376 7579 or by e-mail – email@example.com
Hurley Partners strongly recommends that individuals should seek suitable professional advice regarding the matters referred to in this document, which has been prepared for general interest only. Nothing in this document constitutes advice. Hurley Partners Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 8401891. Registered Office; 12 Conduit Street, Mayfair, London, W1S 2XH. © Hurley Partners Limited 2020