Understand the pension changes for GPs and higher earners announced at Budget 2020.
Sign me up for updates
Pension tax relief was the subject of much debate before the Budget with many commentators assuming that the Chancellor would seek to reduce the annual cost to the Treasury (estimated to be around £40bn a year). These fears proved unfounded: instead the Chancellor took action to focus on the immediate tax problem of the Annual Allowance (AA) charges frequently incurred by senior NHS staff.
As a reminder, for 2019/20 where an individual’s ‘adjusted income’ exceeds £150,000 the £40,000 AA must be restricted by £1 for every £2 of income in excess of £150,000 down to a minimum of £10,000. Currently, the restriction is not applied where ‘threshold income’ does not exceed £110,000.
As ‘adjusted income’ includes the growth in value of your pension entitlement, this has been a particular issue with the NHS and its defined benefit scheme with some consultants refusing to work additional hours when their adjusted income for the year reached £150,000. For 2019/20, the NHS allowed the local NHS trusts flexibility to agree that certain income was not pensionable to help with the exposure to tax charges. The NHS has also announced that in certain cases where a tax charge arises from excess pension growth, the tax should be paid under the scheme pays option but the individual will be compensated for the resulting loss of pension entitlement when the pension is drawn.
The Budget announcement seeks to address this issue for 2020/21 by raising both the ‘adjusted income’ and ‘threshold income’ amounts by £90,000 to £240,000 and £200,000 respectively. The Government hopes the raised thresholds will mean that almost all NHS clinicians will no longer have their AA restricted. However, where an individual’s ‘adjusted income’ exceeds £240,000 and the AA is restricted, the minimum AA will be £4,000 for 2020/21 and later years (rather than £10,000). The lifetime allowance will also be increased in line with CPI to £1,073,100.
As a consequence of these new thresholds, the special compensation arrangements introduced in the NHS for 2019/20 tax year will not be continued.
While the changes are welcome, particularly with the current surge in the workload of NHS teams, many GPs and consultants that have private practice income may still face an AA charge in 2020/21 and future years.
These new AA thresholds apply to all UK individuals not just NHS workers and the Treasury estimates that the combined cost in lost revenue will be around £2bn over the next five years. And as salaries rise over time, the issue of AA charges will gradually remerge unless the Government carries out a more fundamental change to the rules. Therefore, it is quite possible that the Chancellor will return to the longer term issues around pensions tax relief in his autumn Budget – assuming the current Coronavirus crisis and its economic affects have eased by then.
If you have any questions on your personal tax position on your pensions, please get in touch with your usual BDO contact.
Please contact our team for help and advice on the financial implications of any of the Budget announcements.