Government proposes emergency NHS pension tax fix but does it risk creating more problems?

The dog’s breakfast that is the annual allowance tax taper is getting more and more ridiculous by the day. It is ludicrous that the UK’s mind-bogglingly complex pension tax system is now causing significant capacity issues for the NHS – effectively putting people’s lives at risk as senior consultants refuse shifts to avoid huge tax bills.

In keeping with the Treasury’s overall approach to pension tax relief policy, this latest fix is a bit of a mess as well.

While political focus is understandably on averting a winter NHS crisis – and the negative headlines that would accompany this as a general election draws near – this proposal effectively means handing one particular group of workers more generous pension tax terms than everyone else.

Those in other sectors who are also affected by the taper but aren’t being offered similar levels of compensation will understandably feel aggrieved.

Rather than chasing sticking plaster solutions, the Government should accept the taper – however well intentioned – is a bad policy and scrap it altogether. This would cost around £1 billion a year, which in the grand scheme of state spending isn’t a huge price to pay.

This should be a precursor to a more radical review of pension tax relief in the UK, with the aim of building on the early success of auto-enrolment by creating a simpler set of savings incentives that people can understand.”

How the annual allowance taper works

Whether or not someone is affected by the annual allowance taper depends on two things: ‘adjusted income’ and ‘threshold income’. Broadly, adjusted income includes all taxable income and employer pension contributions.

Threshold income is total taxable income and any salary sacrifice arrangements set up since 9 July 2015 less any personal pension contributions. Any lump sum death benefits where the recipient is liable to tax are also deducted from both income measures.

If someone’s adjusted income is above £150,000 and their threshold income is above £110,000, they will be affected by the taper. Their annual allowance will be reduced by £1 for every £2 of adjusted income above £150,000.

For example, if their adjusted income was £160,000 for a given tax year their annual allowance would drop by £5,000 to £35,000.

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