We all have huge cause to be grateful to NHS staff during this once-in-a-generation health crisis, but some higher earners wishing to make pension contributions have even more cause than most.
It was because of the adverse impact that the former tapered annual allowance limit had on the availability of senior NHS staff that new Chancellor of the Exchequer Rishi Sunak felt it was essential to raise it in his recent Budget.
Pension savers had the ability to enjoy tax relief at their highest rate on contributions up to the £40,000 annual allowance as long as they weren’t exceeding the lifetime allowance – the maximum that an individual can accrue in a registered pension scheme tax-efficiently over their lifetime (set at £1.073 million for the 2020/21 tax year).
But, since April 2016, a ‘taper’ system had penalised those whose adjusted income (broadly net income plus pension contributions) exceeded £150,000 and whose threshold income (broadly net income before tax excluding pension contributions) exceeded £110,000.
The £40,000 annual allowance had reduced by £1 for every £2 that adjusted income exceeded £150,000 – up to a maximum of £30,000. Those with an adjusted income of over £210,000 have therefore had an annual allowance of only £10,000.
This meant that many consultants and GPs were refusing to take extra shifts because they knew it would result in significant and disproportionate tax penalties.
But, under the new rules for the 2020/21 tax year, the tapered annual allowance only applies to individuals whose threshold incomes exceed £200,000 and whose adjusted incomes are greater than £240,000.
This £90,000 increase takes around 98% of consultants and 96% of GPs out of the scope of the taper altogether, and also potentially benefits many high earners of all sorts who have nothing to do with the medical profession.
So, it is important that employers make such employees aware of the opportunity to enjoy tax-relief at their highest rate of tax by making additional pension contributions.
Doing so should benefit the employer as well as the employee because having employees with pension pots that don’t allow them to retire at the time they had originally intended can play havoc with a firm’s succession planning.
Also beneficial was the decision to increase the lifetime allowance in line with the Consumer Price Index to its current £1.073 million level.
It was not, however, all quite such good news for the very highest earners because for the current tax year the Chancellor has reduced the minimum level to which the annual allowance can taper down – from £10,000 to £4,000.
This means that anyone with an adjusted income of over £312,000 has had an annual allowance of only £4,000 since April 6th this year.
At the very least, employers should be sending out generic communications to all employees in this earning bracket, even if they leave them to make their own decisions on what steps to take.
Some employers may wish to go further and to redesign their pension schemes for those now subject to the £4,000 annual allowance. They could perhaps consider offering cash supplements to make up for any pension shortfall.
They could also consider referring those affected by the £4,000 a year restriction for individual face-to-face financial planning advice with a suitable independent financial adviser (IFA). They may even decide to fund or part-fund these sessions.
Chase de Vere is unusually well placed to help in this respect because, unlike many of our competitors in the corporate pension consultancy space, we also have an IFA arm.
In addition to ensuring that the individuals we are advising take full advantage of their maximum pension and ISA allowances, we can also consider whether they might benefit from other tax-efficient investments like Enterprise Investment Schemes (EISs) and Venture Capital Trusts (VCTs).
These latter vehicles are not suitable for everyone because, although they offer unusually high rates of tax relief, they also involve high degrees of risk. But they should at least be considered.
Content correct at time of writing and is intended for general information only and should not be construed as advice.