Pensions insight
The tapered annual allowance
Ian Neale, director, Aries Insight, argues the TAAmust go
T he disquiet among National Health Service (NHS) consultants and GP practice partners has forced ministers to pay attention to the tapered annual allowance (TAA), which the government admits could affect a third of senior NHS employees. The TAA applies to ‘high-income individuals’ for the relevant tax year: broadly the same class who were subject to the special annual allowance for the 2009/10 and 2010/11 tax years (provisions which, ironically, were repealed by the incoming coalition government in 2010 because they were too complicated). A member of a registered pension scheme with an income of over £150,000, individual unless their income excluding pension contributions does not exceed £110,000 – the ‘threshold income’. The income including pension contributions is referred to as ‘adjusted income’. The taper’s effect is to reduce the individual’s annual allowance (AA) by £1 for every £2 that the adjusted income exceeds £150,000 with a maximum reduction of £30,000. That is to say, whilst the AA remains at £40,000, all members of a registered pension scheme affected by the taper will have a TAA of at least £10,000. A person with an adjusted income of £210,000 or more will have the minimum TAA. The calculations can be quite complicated: various deductions and add-backs might have to be factored in. Anti-avoidance rules apply so that any salary sacrifice, or flexible remuneration, arrangement set up after 8 July 2015 will be included for the purposes of the threshold income. These rules also prevent a member from reducing or avoiding the impact of the TAA by entering into an agreement under which income properly due in respect of a particular tax year is paid to the member in a different tax year. The problem, essentially, is that because income here includes non-pensionable earnings, such as pay for additional shifts worked over and above full-time contracted hours, scheme members often do not know whether they are going to be including the value of any pension contributions, will be a high-income
hit by an AA charge until it is too late to avoid it. Scope for individuals, such as NHS staff, to avoid a change by carrying forward unused AA from the three preceding tax years has largely evaporated since the introduction of the taper in 2016. ...taper’s effect is to reduce the individual’s annual allowance... A freedom of information request by the Financial Adviser revealed that extra tax paid by public sector pension schemes, on behalf of their members, had doubled since the introduction of the TAA. Nearly 3,900 members of the NHS scheme used this ‘scheme pays’ facility in 2017/18, significantly more than any other public sector scheme. (‘Scheme pays’ means the scheme pays the AA charge and recovers it scheme offers many of those affected a ‘voluntary scheme pays’ option, offering to cover any AA charge. Most pension schemes only offer ‘mandatory scheme pays’ i.e. for those members who have a total pension input amount of more than £40,000 and an AA charge liability of more than £2,000. Extending this voluntarily brings more challenging deadlines for tax compliance. The government is scrambling to head off the growing tendency for senior clinicians to decline additional shifts in order to keep their income below the TAA threshold. An initial proposal to allow NHS staff to opt for 50% of their normal entitlement to accrual in return for paying only 50% of the normal contributions was quickly withdrawn in favour of a broader consultation, published on 11 September 2019, which would allow any percentage from 10% to 100%, in 10% steps. Ancillary benefits such as ‘death in service’ life cover and survivor benefits from the member’s benefits later.) That might be because the NHS
would continue to be provided in full, together with ill health retirement cover, increasing the employer contributions required. Other proposals include phasing the pension ability of large pay increases (only for high earners) and changing the way ‘scheme pays, is implemented to make the effect on a member’s benefits clearer. All this will add to complexity. Costs to employers have been further exacerbated by the Supreme Court ruling that the government cannot appeal the Court of Appeal decision in the McCloud case. That judgment ruled that transitional provisions introduced to the reformed judges and firefighters pension schemes in 2015 gave rise to unlawful age discrimination. The government accepts this also applies to the NHS, and estimates that to remedy this will cost an extra £4bn per year from 2015. The chancellor of the exchequer said that it is critical to introduce flexibility into the system and the government would be reviewing the operation of the TAA “in order to support the delivery of public services”. This might result in similar flexibility being offered to firefighters, police, or the armed services, for example; but it seems the Treasury is unwilling to go further. The TAA, at least in its present form, has to go; and of course, it can’t be scrapped just for NHS staff, nor just for the public sector as a whole. Pensions tax legislation cannot, or should not, discriminate between public and private sector workers, who are increasingly affected too. So, it is not just the NHS; nor is the current disaffection confined to the TAA. Anyone who opts for phased retirement, supplementing reduced job earnings by drawdown from a money purchase pot, will find they incur a tax charge if contributions to that pot go over £4,000 (down from £10,000 since April 2017). Meanwhile successive reductions to the lifetime allowance mean a fast-growing number of pension savers are hit by a tax charge at or even before retirement. How much longer before a comprehensive review of the pensions tax regime? n
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| Professional in Payroll, Pensions and Reward |
Issue 54 | October 2019
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