Budget 2020: pension contribution allowance changed

12th March 2020

The Budget on 11 March 2020 contained measures to limit the damage being done by the current pension tax system to penalise doctors and dentists.

The Chancellor mentioned he had listened to concerns from all sides, and that the pensions tax system is preventing doctors from taking on more hours.

In response, he announced changes to the tapering of the pension annual allowance for all taxpayers. The income limits used in calculating the tapered annual allowance are increased, although the minimum tapered annual allowance was reduced.

Thresholds

Threshold income, broadly net income before tax, is increased from £110,000 to £200,000.

Adjusted income, broadly net income plus pension accrual, is increased from £150,000 to £240,000.

Keeping under the raised income limits will avoid tapering of the current £40,000 pension annual allowance. 

The minimum tapered annual allowance is, however, decreased from £10,000 to £4,000.

Figures used by the Chancellor suggest that the above changes will result in only the highest earners, around 2% of consultants and 4% of GPs, remaining subject to tapering of the pension annual allowance. 

Reducing the minimum pension annual allowance from £10,000 to £4,000 will adversely impact those with adjusted incomes above £300,000.

Lifetime allowance

In line with recent years, the pension lifetime allowance will be raised in April 2020 by consumer price inflation from £1,055,000 to £1,073,100. 

Pay in lieu of pensions

The Chancellor also announced that proposals to offer greater pay in lieu of pensions for senior clinicians in the NHS pension scheme will not be taken forward.

Impact of the changes

These announcements, apart from the 2%-4% of doctors that the Chancellor indicated will still be caught by pension annual allowance tapering, will effectively revert to the position that existed before tapering was introduced on 6 April 2016, when the full £40,000 annual allowance was available unrestricted for offset against annual pension growth. 

Doctors should note that NHS pension input amounts (growth) will still be calculated as before based on annual pensionable earnings, and also influenced by fluctuations in consumer price inflation.

The pension annual allowance can still be breached, resulting in annual tax charges on the excess, subject to unused allowances from the previous three years. With no significant increase to the lifetime allowance, doctors should still plan ahead carefully.

At the time of writing, it remains to be seen if there will also be NHS pension flexibilities following the pensions consultation which took place at the end of 2019, which could further help to mitigate pension excess charges.

If you would like to know more about the changes to pensions allowances, please contact our GP and NHS Pensions expert, Steve Tucker, for more information.

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