UK Pensions – is the current annual allowance limit unfair and unworkable? 

The Revenue has been forced, finally, to face up to the fact that the annual allowance changes in relation to pensions contributions which attract tax relief, and which were brought into force in April 2016, are unfair and unworkable. The Treasury announced on 7 August 2019 that there will be a consultation on proposals to vary contribution rates for NHS staff to minimise the impact of the annual allowance on them.

Currently, the annual allowance (broadly the rate contributions can be paid to a defined contribution scheme or the amount benefits can be built up in a defined benefits scheme) is capped at £40,000 per annum. Exceeding the annual allowance results in an annual allowance tax charge. But the situation is more complex for high earners. Since April 2016, a tapered allowance has been in force in respect of income over £150,000 per year. The maximum reduction which can apply under the taper is £30,000, so that an individual with earnings of over £210,000 will have their annual allowance capped at £10,000. 

This taper was introduced despite warnings that it would impact on public service workers. There has been much publicity recently about senior doctors and consultants cutting down on overtime to avoid pension tax disadvantages, which could result in increases to hospital waiting times. 

But this problem cannot be looked at in isolation – any changes to the system must apply across the board to private and public sector workers. The introduction of the taper, in combination with the lowering of the lifetime allowance to stand currently at £1,030,000, has stopped many high earners from contributing to pensions schemes. 

The whole system of relief needs an urgent re-think. It makes no economic sense to prevent retirement savings in an ageing society. It is to be hoped that the review for NHS workers triggers a wider response.

 

 

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