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Treasury response to annual allowance issues seen as ‘sticking plaster’ approach

17 January 2020

A potential increase to the tapered annual allowance threshold, which the Treasury could raise from £110,00 to £150,000, has been met with criticism amongst the financial advice community.

Reports have suggested that the Treasury is preparing to increase the threshold to stop NHS doctors being hit with huge tax bills. The latter have been blamed for preventing doctors from working overtime, placing patient care under extra strain. However, the proposed solution has been dubbed a “sticking plaster” approach by industry experts.

Helen Morrissey, pension specialist, Royal London, said: “While this news will be good for some in reality it is further evidence of HM Treasury choosing to tinker at the edges rather than tackle the source of the problem which is that the taper must be scrapped. In short this is like using a sticking plaster in place of major surgery – we need reform of pension tax relief.”

Under current rules, anyone with “threshold” income above £110,000 and “adjusted” income above £150,000 has their annual allowance reduced.

Intelligent Pensions technical director Fiona Tait said while raising the threshold would mean fewer people would be impacted by the taper, the proposal fails to remove the complexity of the regime.

She said: “The obvious and most popular action would be to simply abolish the taper, and to call for a wider review into pension tax relief in general. Since 2006 there has been progressive tinkering with the rules, which have put us back to a position where tax relief is almost impossible for most people to follow and has resulted in a number of unintended consequences such as the impact on the NHS.

“This issue really came to light when NHS doctors were shocked to discover they were financially worse off by working overtime. However, I have no doubt there will be many doctors who will be impacted at the £150,000 threshold so is this really ‘problem solved’ or just goalposts moved?”

Ian Browne, retirement expert, Quilter, echoed the sentiment, describing the overall tapered annual allowance system “flawed.”

He said: “While this would numb the problem currently crippling the NHS pension scheme, ultimately the system is still flawed. It does not cure the problem plaguing the NHS and other high earning professions. The pension taxation system is unnecessarily complicated and broken. More tinkering will make that worse.

“Policy makers shouldn’t be naïve. While the taper was one of the original issues for the NHS pension scheme, the resultant scrutiny of how the NHS Pension and Annual Allowance works has definitely opened the eyes of some doctors. They are now aware of flaws in the system such as overly complex calculations, paying taxes on pension benefits that never manifest, negative pension input amounts that get zeroed in HMRC’s favour, interest from HMRC on ‘late’ tax payments caused by the scheme not providing the right information at the right time. The pension taxation system needs a wholesale independent review.”

It remains unclear whether providing a larger annual allowance is viewed as an end solution by the Treasury to deal with the NHS pensions crisis or the beginning of a wider reform programme.

According to AJ Bell senior analyst Tom Selby, the problem with the taper isn’t just the point at which it takes hold – it is the because factors like overtime make earnings levels far from certain meaning many people will have no idea if or to what extent they will be affected.

He said: “When you combine that uncertainty with the mind-boggling complexity of calculating the taper, particularly in relation to defined benefit schemes, it is far from clear that simply raising the point at which it takes effect will be enough to stop doctors refusing shifts.

“The optics are certainly tricky as this move alone hands more tax relief to higher earners, while failing to remove the mind-boggling complexity created by the taper. If this is just a sticking plaster solution, we hope the next step will be for the Chancellor to consult on a far wider, more radical pension tax simplification agenda.”

AJ Bell has called for both the taper and the money purchase annual allowance to be scrapped, meaning pension tax costs would be controlled by a single annual allowance and the lifetime allowance.