In his Budget delivered on 11 March, Chancellor Rishi Sunak announced that the Government is overhauling pension tax rules for higher earners, primarily in a bid to end its bitter dispute with senior NHS staff.
The standard tax-free annual allowance on pension contributions is currently £40,000 but this starts to taper down to £10,000 for individuals earning more than £110,000.
However, the Chancellor announced in the Budget that the tapered annual allowance thresholds will both be increased by £90,000 to £200,000. As a consequence, from April, the tapered annual allowance will not affect people with an annual income of less than £200,000 – the “threshold income”. Only where an individual has an “adjusted income” of £240,000 or more will the annual allowance begin to taper down.
Mr Sunak stated that it would take about 98 per cent of consultants and 96 per cent of GPs out of the taper.
The Chancellor also announced that the Government would reduce the minimum level to which the annual allowance can taper to £4,000 from £10,000, which he said would only impact those with total income, including pension accrual, of around £300,000.
However, while healthcare leaders welcomed the move, saying that it should provide a significant boost to frontline care, other critics of the taper wondered why it was not abolished altogether.
The pension tax system is incredibly complex, and many felt that the Chancellor missed the opportunity of simplifying the system by scrapping the taper.
Meanwhile, another potentially missed opportunity was that there were no changes to inheritance tax (IHT) in the Budget. It had been predicted that the Chancellor would overhaul IHT by reducing it to 10 per cent, remove the lifetime gifting allowances and scrap business property relief (BPR).
However, there was no mention of IHT in the Budget, possibly because a lot of the changes that were proposed will be very costly to the Government and the money has to come from somewhere.