The unpopular pensions tax taper system is here to stay.
Chancellor Philip Hammond has defended the existing pensions tax taper arrangements, which have been brought into the spotlight of late following warnings from the British Medical Association (BMA) that NHS doctors will start reducing their working hours to avoid being hit by stealth taxes.
Under the taper system introduced in the 2016/17 tax year, high earners with an income above £150,000 are severely restricted in regard to how much they can save into their pensions, as their £40,000 annual allowance is reduced by £1 for every £2 of income above £150,000, with a maximum reduction of £30,000. Therefore, anyone earning more than £210,000 can pay only £10,000 into a pension each year.
These restrictions combined with the pension lifetime allowance, which stands at £1.055 million, has led to some doctors opting to retire early or reduce their hours. Those who breach the lifetime allowance are heavily penalised, with punitive tax charges of 55% due on money above the limit if it is taken as a lump sum, or 25% if it is taken as income.
But in a debate in parliament earlier this week (21 May), Mr Hammond ruled out making any future tweaks to the taper system, stating that it is “necessary to deliver a fair system to protect public finances”. He added: “These measures only affect the highest-earning pension savers and are expected to raise £6 billion a year.”
Mr Hammond did offer some hope to doctors, though. He said he is in discussions with Matt Hancock, the health secretary, in regards to how to make the pension system more flexible for doctors.
The idea of the pension annual allowance, lifetime allowance or indeed both being changed for some but not for all looks unlikely.
Instead, as Gary Smith, chartered financial planner at Tilney, points out: “The path to addressing this is now very clearly going to come from making changes to the NHS pension scheme rather than the allowance itself to make it more flexible, so that high-earning clinicians are not faced with difficult decisions around reducing hours or retiring earlier to avoid tax charges.
“This will most likely take the form of allowing doctors to take partial membership of the scheme or breaks from it in exchange for higher salaries, so hopefully there will be some positive new options available for doctors in due course.”
Extra flexibility for NHS doctors, while welcomed, would represent “only a fig leaf designed to gloss over the fact that the taper is an ill-conceived policy”, according to Ian Browne, a pension expert at Quilter.
He adds: “The annual allowance taper has heaped an added layer of complexity onto an already bemusing pension tax system in the UK.
"The policy is short-sighted as it focuses only on saving on tax relief and shows scant regard for the long-term consequences on savings behaviours – consumers are discouraged from saving because of the complexity and opacity of a tax system that can only be understood by industry experts.
“The chancellor should swallow his pride and accept that it deserves to be resigned to the long list of tax reforms that look good on paper but fail in practice.”
This article first appeared on our sister website Money Observer