Rupert Jones 

Chancellor boosts high earners with action to end pensions ‘tax trap’

Move to stop doctors turning down shifts also means tax cut for those on £110,000 a year
  
  

A hospital ward
Some senior doctors had stopped doing extra shifts to avoid unexpected tax bills, putting pressure on the NHS. Photograph: Peter Byrne/PA

Hundreds of thousands of higher earners will in effect enjoy a tax cut after the chancellor took drastic action to tackle a pensions “tax trap” that was causing senior doctors to turn down extra shifts.

With health services coming under increasing pressure as a result of the coronavirus outbreak, the government announced changes to pension tax rules affecting people paid more than £110,000 a year.

The move affects all high earners, not just medical professionals, and is likely to be welcomed by many of those who had feared the government might strip well-off individuals of their 40% pensions tax relief.

Some doctors and other workers had stopped doing additional shifts because they were worried their extra earnings would increase their pension pot by more than the maximum allowance, triggering an extra tax charge.

People can receive valuable tax relief on their pension, but rule changes introduced in 2016 meant rising numbers of GPs, consultants and other senior medical staff were facing unexpected tax bills linked to the value of their retirement pots.

The situation had led to a standoff, with NHS operations being cancelled, waiting times increasing, cancer scans going unread for weeks and some staff taking early retirement. So the government is changing the complex rules relating to the “tapered annual allowance” that limits the amount high earners can pay into their pensions.

The chancellor is increasing by £90,000 the threshold at which the system kicks in – a more generous change than most experts anticipated. At the moment, the rules start to bite when an individual’s “threshold income” (taxable earnings minus personal pension contributions) is above £110,000 and “adjusted income” (taxable earnings plus employer contributions) is above £150,000. Where both limits are breached, the annual allowance reduces by £1 for every £2 of income above £150,000.

The regime has resulted in some surgeons, anaesthetists and others incurring tax charges if they take on extra work which boosts their pension pots. There have been reports of tax bills of up to £100,000, with some individuals apparently having to remortgage their homes.

To address this, from 2020-21 the threshold income will jump to £200,000, while the new adjusted income figure will be £240,000.

Sunak said that by doing this, he was “removing anyone with income below £200,000”. Ninety-eight percent of consultants and 96% of GPs will be taken out of the taper altogether.

In the run-up to the budget there was speculation that the chancellor might mount a raid on pensions tax relief, but Jason Hollands, the managing director of investment group Tilney, said: “Having braced themselves for the worst, many higher earners will not only feel relief but be absolutely delighted.”

He added: “In effect this means only those with earnings over £240,000 will be subject to an erosion of their annual pension allowance rather than it kicking in for those with total earnings over £150,000. This is therefore a de facto tax cut for many high-earning professionals.”

The new rules mean that from the next tax year, if someone’s total income is £200,000 or less after deducting any personal pension contributions, they will not suffer a reduced annual pension allowance, said Nathan Long of investment firm Hargreaves Lansdown.

Someone paid £200,000 and with an employer pension contribution of £40,000 would currently suffer a tax charge of £13,500 for this, but under the new rules they would pay nothing extra, he added.

However, the cost of this shift is being borne by those higher up the earnings scale – specifically, those with total incomes above £300,000, some of whom could see their annual allowance for pensions fall to as little as £4,000.

Tom Selby, a senior analyst at investment platform AJ Bell, said: “With the NHS already straining under the weight of an ageing population and braced to come under more pressure from the coronavirus outbreak, the chancellor simply had to do something.”

The British Medical Association said it had “fought tooth and nail for 18 months” to find a solution to the pensions taxation crisis and was “at last being listened to”.

It added: “The vast majority of doctors are now removed from the effect of the taper and will no longer be in a situation where they are ‘paying to go to work’.”

 

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