There has been much talk in the financial press recently of proposed changes to the tapered annual allowance.
The taper was introduced in 2016 and gradually reduces the annual allowance for high earners. For every £2 of adjusted income above £150,000 a year, £1 of annual allowance is lost.
It has proved unpopular as individuals in that earnings bracket can have their annual pension savings allowance reduced from £40,000 to as little as £10,000. They are also at risk of having a lifetime allowance tax charge on their benefits.
The situation gets bewildering because it hinges on adjusted and threshold income. Adjusted income includes all pension contributions (including any employer contributions) while threshold income excludes them.
To make matters worse, HMRC start with ‘net income’ but do not just mean ‘income after tax’. In this context, they count all taxable income less various deductions, such as member contributions paid to money purchase and defined benefit occupational pension schemes, under the net pay arrangement. This is where the sponsoring employer of the pension scheme deducts employee contributions before tax under PAYE.
The tapered annual allowance has caused particular problems for the medical profession. Many doctors have been forced to limit the work they do in an attempt to avoid significant charges on their pension. The system has reduced any incentive in accepting promotions and has encouraged many to consider early retirement.
As a result of the pension crisis in the NHS, the Treasury has outlined plans to address the taper by raising the threshold of earnings at which the tapered annual allowance starts. However, just increasing the threshold will do nothing, I fear, to reduce the complexity of the taper.
As you may know, I have called for the tapered annual allowance to be ditched altogether. The intricacy of pensions is putting people off saving at a time when the Nation should be saving more, not less.
It’s a topic to watch carefully. HMRC face a substantial decrease in revenue if they do make changes to the taper but the government has pledged to try and solve the crisis.
If you have any queries about your retirement planning or how the tapered annual allowance affects you, do get in touch. You can call us on 01789 263888 or email email@example.com.
A pension is a long-term investment not normally accessible until 55. The value of your investment (and any income from it) can go down as well as up and you may not get back the full amount you invested. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate tax advice.