By Mark Soper
Shortly before the outbreak of Covid-19, a confident, newly-installed Chancellor stood up in the House of Commons and delivered a raft of measures and stimulus that effectively put an end to austerity.
With a landslide win in the December Election and the first phase of Brexit accomplished, the Government – the non-team playing former Chancellor now out of the way – could embark upon its expansive plans.
The virus has stopped all that – for now – and it is difficult to imagine going forward that a second and perhaps deeper period of austerity will soon follow: how else will Government borrowing be repaid? Raising taxes, I hear you say… perhaps a 2p increase in income tax for a year or two? Not the natural solution for a Tory Government…but needs must.
And, of course, the depth of the global economic crisis is intrinsically tied to when the virus can be contained i.e. when a commercially viable vaccine becomes available – the timing of which is anybody’s guess. Six to 18 months depending on which scientist you tune into.
So, we will all have to wait and see.
At the centre of this crisis is the NHS: an heroic cohort sent into battle against an invisible contagion and (many would say) ill prepared to do so.
And here is my (rather neat) segue to the particular pension issue I want to address, and will affect many better-off savers.
Because remembering life before the virus, it was the doctors in the NHS that brought attention to the Treasury that all was not well with the pensions system; and, specifically, the punitive annual allowance tax charge – indirectly, a 45% additional tax if doctors worked extra hours.
Many doctors, surgeons and consultants cut back their hours to protect their income. Not what you want in the middle of a global health crisis.
In his Budget on 11 March Rishi Sunak addressed this head on and, with effect from 6 April 2020, the income threshold when the Annual Allowance kicks in was increased from £110,000 to £200,000 the adjusted income threshold increased from £150,000 to £240,000.
This has brought relief not only to NHS staff but also to anyone else earning over £110,000.
Sunak’s action has thus proven to be very timely – given all the extra effort and hours NHS staff are putting in through this health emergency. This news has been somewhat lost in the media maelstrom in which we now find ourselves.
What this means in more detail
This now means that pension contributions up to the full Annual Allowance of £40,000 a year can now be paid into any pension scheme without the fear of an Annual Allowance Tax Charge being imposed when an individual’s ‘’Adjusted Earnings’’ are less than £240,000.
The Annual Allowance of £40,000 is gradually tapered down by £1 for every £2 where adjusted earnings exceed £240,000.
Under the old rules the maximum taper was £30,000 leaving high earners the ability to contribute £10,000 into a pension plan without attracting any Annual Allowance Tax Charge. Under the new rules, the Annual Allowance can now be reduced (tapered) down to £4,000.
For example, an individual with £300,000 adjusted earnings will have the Annual Allowance tapered down to £10,000 and an individual with £312,000 adjusted earnings will have the Annual Allowance tapered down to £4,000
Finally, for anyone impacted by the taper it may be possible to carry forward any unused allowance from the three prior tax years to mitigate its effect – as always it may be a good idea to seek professional guidance or advice in this area.
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