Budget hikes NHS pension tax threshold by £90,000

The government has increased the threshold at which pension tax penalties kick in by £90,000 in a budget measure designed to prevent thousands of doctors reducing their working hours.

Chancellor Rishi Sunak (Photo: Dan Kitwood /Getty Images)
Chancellor Rishi Sunak (Photo: Dan Kitwood /Getty Images)

Chancellor Rishi Sunak, delivering his first budget just a month after being promoted in a dramatic cabinet reshuffle, announced the decision to increase the annual allowance threshold income to £200,000 from 2020/21 - a £90,000 rise.

The BMA welcomed the move, saying the government had 'finally listened' to warnings over the severe impact of punitive tax penalties that left many doctors facing a reduced income for taking on additional work - but warned the changes fell short of doctors' demands.

BMA pensions committee chair Dr Vishal Sharma said the increased threshold meant the 'vast majority of doctors' would no longer fall into the tax trap. He said: 'Today’s announcement shows that the BMA, which has fought tooth and nail for 18 months to find a solution to the pensions taxation crisis, is at last being listened to.

Pension tax trap

'An increase in the threshold income of all workers to £200,000 demonstrates that the government has heeded the warnings from the BMA and finally taken account of the evidence we have presented.

'The vast majority of doctors are now removed from the effect of the taper and will no longer be in a situation where they are "paying to go to work".'

But the BMA pensions committee chair said the solution was 'long overdue' and although welcome, fell short of measures doctors have called for. The BMA has called for the annual allowance to be scrapped completely for defined benefit schemes such as NHS pensions.

He warned that because the lifetime allowance had not been changed in the budget announcement, 'many doctors will still need to consider taking early retirement'.

Budget 2020

The 11 March budget statement released by the government reflects the findings of a review into the impact of pension tax on the NHS workforce, promised as part of the Conservatives' general election campaign.

The budget statement says that following the review, 'to support the delivery of public services, particularly in the NHS, the two tapered annual allowance thresholds will each be raised by £90,000'.

It adds: 'This means that from 2020/21 the “threshold income” will be £200,000, so individuals with income below this level will not be affected by the tapered annual allowance, and the annual allowance will only begin to taper down for individuals who also have an “adjusted income” above £240,000.'

Alongside the change in the threshold for pension tax, the minimum level to which the basic £40,000 annual allowance can be reduced through tapering will drop from £10,000 to £4,000. This will apply only to 'those on the very highest incomes' and will mean that for doctors 'with total income including pension accrual over £300,000', the annual allowance will drop to this new minimum.

Tax threshold

Andrew Pow, a board member for the Association of Independent Specialist Medical Accountants (Aisma) and partner with Mazars UK, said: 'We welcome the news that the annual allowance threshold for the NHS pension scheme will be increased by £90,000 for the 2020/21 tax year. This means that any doctors earning up to £200,000 will now get the full annual allowance of £40,000.

'While this will not remove higher earners with growth above £40,000 from having a tax charge, it will mean most doctors will not have their annual allowance tapered down. It will be important that NHS pension records are kept up to date so that higher earning doctors can assess their tax position.'

Lifetime allowance on pensions, the maximum amount a person can accrue in a registered pension scheme in a tax-efficient manner over their lifetime, will increase in line with CPI for 2020/21 to £1,073,100, the government has said.

The government has also announced a £5bn fund to support public services to deal with the impact of the growing COVID-19 outbreak, along with £30m in funding for the National Institute for Health Research to carry out rapid research.

The budget statement also confirms the five-year spending programme for the NHS, which will increase the annual NHS budget by £34bn in cash terms by 2023/24.

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