Following repeated disputes and calls to abolish it, the Treasury has announced plans to review the tapered annual allowance for pensions.
The scheme currently applies to those with a taxable adjusted income of more than £150,000 and a threshold income over £110,000. For every £2 of income an individual receives over £150,000, their annual allowance is reduced by £1, down to £10,000.
The amount of pension contributions that can be made tax-free in 2019/20 stands at £40,000 in most cases, but this is restricted for higher earners by the tapered annual allowance.
The tapered annual allowance was first introduced in April 2016 in a bid to control the cost of pensions tax relief and ensure it’s fair and affordable. It has received much backlash however as the rules have caused unexpectedly high tax bills for some NHS professionals, who as a result, have refused to take on extra shifts.
Statistics published by HMRC last year found that 16,500 professionals exceeded their annual allowance compared to just 5,400 the year before so there’s no doubt the scheme is having a huge impact.
It’s feared that until the allowance is removed, doctors won’t return to working extra shifts to help remove waiting list backlogs and support colleagues where there are rota gaps because they fear receiving high tax bills.
Another issue is that higher earners may not know the full value of their income until the end of the tax year. With the amount of their taxable income dictating how much they can contribute to their pension without triggering an annual allowance charge, many may accidentally exceed their allowance or be too cautious and not contribute as much as they could.
In response to criticisms, the Treasury has said it will review how the tapered annual allowance supports the delivery of public services.
Chancellor Sajid Javid commented:
“This Government has listened to concerns and will be reviewing the operation of the tapered annual allowance.”
Royal London has welcomed the announcement, but argued the taper should be scrapped for people in all areas of work.
Steve Webb, director of policy at Royal London, said:
“A review of the tapered annual allowance is long overdue. It must be comprehensive and cover everyone affected by this absurdly complex taper, including in the private sector.”
He continued:
“The best solution by far would be outright abolition, even if this meant a slightly lower annual allowance across the board.”
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