The new rules on pension tapering
24 March 2020
24 March 2020
In the Budget it was announced that in 2020/21, the threshold income level and the adjusted income level for the tapered annual allowance will both be increasing. The increases were the Government’s attempt to solve the NHS pension problem as promised in the 2019 Conservative Party manifesto. In this article you can find the new rules on Pension Tapering.
In the Budget it was announced that in 2020/21, the threshold income level and the adjusted income level for the tapered annual allowance will both be increasing by £90,000 to £200,000 and £240,000 respectively. The increases were the Government’s attempt to solve the NHS pension problem as promised in the 2019 Conservative Party manifesto. The increases were far more substantial than many had expected, perhaps a reflection of the current environment and the need for medical staff’s full cooperation being even more crucial than usual.
The minimum the taper can take the annual allowance down to will be £4,000 from 2020/21, a reduction from the current £10,000. The tapering will still work in the same way with the annual allowance reducing by £1 for every £2 of income where Threshold Income exceeds £200,000 and Adjusted Income exceeds £240,000. However, the tapering band will now widen, decreasing the annual allowance from £40,000 where Adjusted Income is £240,000 down to £4,000 where Adjusted Income is £312,000 or more.
For example, where a client’s Threshold Income exceeds £200,000 and their Adjusted Income is £304,000 the annual allowance becomes £8,000 i.e. £40,000 - £64,000/2.
So, whilst those with Adjusted Income of more than £300,000 will see a lower annual allowance, the changes will be good news for many high earners who may either now fall outside of the scope of tapering or see an increase their allowances. Anyone who has recommended a client opts out of a pension scheme, or advised clients to take reduced pension contributions in exchange for increased salary, should revisit these calculations for 2020/21 onwards in light of this change
This will not have an impact in the 2019/20 tax year, and it will not affect the amounts of unused annual allowance available for carry forward from tax years prior to 2020/21.
In terms of the senior clinicians the changes were aimed at, this will of course be good news, and many will no longer need to worry about tapering. Only the very highest earners will now be affected.
However, many of the issues relating to specifics of the NHS pension scheme and the NHS reward structure, together with the way the annual allowance is calculated for defined benefit schemes still exist and demand for advice from client’s is likely to remain high.
The Budget also announced that proposals to offer greater pay in lieu of pension contributions for senior clinicians in the NHS Pension Scheme will not be taken forward. This was part of a wider consultation offering increased flexibility in the scheme with the aim to allow members to try and control their pension inputs with reduced accrual rates. For example, the member could elect to reduce their input by 30% a year and receive the rest as a cash payment of both their personal and the employer contribution levels. It is not yet clear if this means that the whole idea of greater flexibility has been dropped or just that there will be no payments in lieu. Clearly without the additional pay any flexible options will be far less attractive.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.