The Spring Budget included some changes to pensions tax. Our pensions advisers ISIO outline the detail behind this, the implications for pension scheme members, and what your housing association should consider.
The pensions talk in the lead-up to the Budget centred around the NHS. Hospital doctors and GPs have been struggling with the annual allowance taper ever since it was introduced in 2016, but it has come to a head in this tax year with many more doctors refusing extra shifts and GPs in particular talking about early retirement.
In addition, there had been some speculation that a cash-strapped government might be tempted to implement, or at least reopen consultation on, more drastic reform of the pensions tax system such as introducing a flat rate of tax relief.
Pensions tax got a bit simpler, but only in respect of the taper.
In the end there was just one headline change:
There were also a couple of other announcements:
An easement in the annual allowance taper had been widely trailed in the press prior to the Budget. For most individuals, the standard annual allowance of £40,000 applies. But higher earners – under the current rules this is those with ‘threshold income’ above £110,000 a year and ‘adjusted income’ over £150,000 a year – will have their annual allowance reduced by £1 for every £2 of excess income.
A minimum allowance of £10,000 applies to those with adjusted income over £210,000. Threshold income is, broadly, income from all sources, but excluding the value of pensions input, and adjusted income is income including the value of pensions input.
From tax year 2020/21, both income thresholds will be increased by £90,000 (to £200,000 and £240,000 respectively), with the minimum allowance falling to £4,000 for those with adjusted income over £312,000.
This change comes with an estimated cost of £2bn over five years at a time of significant spending constraints. And it comes with no real cost mitigation either, except the reduction in the annual allowance to £4,000 for the very highest earners. It might have been expected that such a large increase in the taper would be accompanied by a modest reduction in the annual allowance for all.
The result of this change is an unexpected tax windfall for higher earners. Whilst the new taper is a worsening of the position for anyone with income over £312,000, it is an improvement for everyone else who was previously affected by the taper.
Anyone with total income below £240,000 will have the full annual allowance for pensions savings of £40,000 from next year. Those who gain the most are in the range £210,000 to £240,000, who pick up £13,500 a year. So there are two groups that benefit:
For both groups it is the same result – more tax-free pension savings than before – but thought needs to be given to how this is communicated to scheme members. For example, members of Defined Contribution schemes who are considering paying more need to be reminded to check their lifetime allowance position as well.
If your organisation offers a cash alternative to a pension for your higher earners you may want to review this, and to consider eligibility for the cash alternative, such as the salary thresholds. The below scenarios may also be worth thinking about: