Tapered annual allowance threshold for pension tax relief to increase by £90,000

Budget 2020: Chancellor Rishi Sunak announced today (11 March 2020) that that the tapered annual allowance threshold for pensions tax relief will be increased by £90,000.

This means that from 2020/2021, the threshold income will be £200,000; those employees that earn below this level will not be affected by the tapered annual allowance.

From April 2020, the minimum level to which the annual allowance can taper down will reduce from £10,000 to £4,000. This will only affect employees with a total income, including pension accrual, of over £300,000.

The lifetime allowance, namely the maximum amount an employee can accrue in a registered pension scheme in a tax-efficient manner over their lifetime, will increase in line with the consumer price index (CPI) for 2020/21, rising to £1,073,100.

Steven Cameron, pensions director at Aegon, said: “While it’s disappointing that the Chancellor didn’t simply scrap the dreaded tapered annual allowance, the £90,000 increase in the earnings threshold when it kicks in is greater than expected and should offer comfort to many more higher earners that they shouldn’t be affected. But for those earning above £300,000, an annual allowance of just £4,000 surely makes pensions redundant for them.

“Budget 2020 rightly focused on the nation’s health and economic resilience in response to the Coronavirus. So it’s perhaps not surprising that the single pensions change was designed to stop senior NHS professionals turning down extra work or retiring early to avoid a pensions tax penalty. The change applies across all occupations and not just to NHS professionals, avoiding making pensions allowances occupation specific.

“Unfortunately, simply moving the thresholds misses the opportunity to start to simplify the fiendishly complex system of pension limits and allowances. This may be something the Chancellor returns to in a future budget, ideally as part of a wider consultation on how to reform pension tax reliefs.”

Danny Mortimer, chief executive at NHS Employers, part of the NHS Confederation, said: “Employers across the NHS will welcome this significant step in reforming pensions taxation. The overwhelming majority of NHS employees will no longer face the uncertainty and distress of the application of the annual allowance taper based on additional NHS earnings.

“This importantly provides certainty for them. Employers will also hope that this announcement reassures clinical colleagues so that they can agree to undertake additional work without the perverse consequences that have resulted in recent years.

“The change in the taper will also benefit a wider range of employees, and this is also very welcome.”

Paul McGlone, president of the Society of Pension Professionals (SPP), commented: “The proposed changes to the tapered annual allowance will positively impact a large number of people not just those high paid medical professionals in the NHS.

“It is however worth bearing in mind that the changes don’t come in until next year, so any work done by doctors until 5 April will still be taxed in a very penal way. Doctors may end up returning to work just in time for the peak of the Coronavirus.”