In an effort to reduce the effects of the pension Tax Annual Allowance Taper on consultants and GPs working for the NHS, Sunak has redefined the high earner brackets, reports Pete Wilson.
Fresh-faced Chancellor of the Exchequer, Rishi Sunak, unveiled the biggest fiscal stimulus seen in the UK in decades with his Budget on Wednesday 11th of March.
As part of his Budget changes, Sunak’s decision to redefine the high earner brackets with regard to the pension tax annual allowance taper has been met with staunch agreement from experts across the investment industry, but many lament a missed opportunity to simplify this complex part of the pension tax system.
Under political pressure,it seems that Sunak has chosen a short-term tweak over comprehensive reform.
Before the budget, Tapered Annual Allowance would see immediate tax bills on excess earnings discouraging doctors in particular to accept overtime.
The issue was therefore put in the spotlight following problems it had caused within the NHS. Tom Selby, senior analyst at AJ Bell, highlights that the Chancellor is hoping to ensure the Health Service has the people it needs to deal with the Coronavirus. Svenja Keller, Head of Wealth Planning, Killik & Co, said the announcement “should be a significant boost to frontline healthcare.” Jason Hollands, Managing Director at Tilney made clear that announcement does not just affect those in the medical industry, and is “a de facto tax cut for many high earning professionals.”
The threshold income for the tapered annual allowance will be raised from £110,000 (£150,000 adjusted income) to £200,000 (£240,000 adjusted income). The minimum annual allowance has dropped 60% from £10,000 to £4,000.
Tim Holmes, Managing Director at Salisbury House Wealth, rejoiced, saying, “The Tapered Annual Allowance has been penalizing higher earners trying to save for far too long – it is great to see more savers being freed from this.”
Nilesh Shah, specialist in Executive Pensions at Barnett Waddingham, also emphasized the positive, “some of the high earners will see their AA tax bills reduced by up to £13,500 net,” but also highlighted, “Tinkering around the edges of pensions taxation is not going to solve the issues.” This sentiment was a common insight from the industry. Keller asked, “Why not just abolish it?” Continuing “the threshold is now so high that it will take many out of the tapering regime regardless.”
Other professionals spoke the negative impact and added complexity to those earning above £240,000 adjusted income. Claire Trott, Head of Pensions Strategy at St. James’s Place said “we now have the added complexity of the reduction to £4,000 for those earning over £300,000 adding an additional cliff edge into the mix.”
Paul Flood, manager of the BNY Mellon Multi-Asset Income Fund said “Adjustments to pension tax with the minimum tax free contribution allowance being lowered to £4000 will impact younger pension savers and is another knockback to younger demographics who will struggle to save up anywhere near the pensions that older demographics have managed to do.”
Selby explained the cost is “being borne by those higher up the income scale with adjusted income above £300,000, who could see their annual allowance dip as low as £4,000.” Though Selby, and all of the professionals mentioned, welcomed the relief, he was not alone in expressing disappointment over the government failing to altogether scrap the “hideously complicated part of the pension tax system.”