Budget 2020: High earners get pension tax relief boost to help doctors

The Government is overhauling pension tax rules for higher earners to end a bitter dispute with doctors, who were turning down shifts to avoid shock bills.

In a Budget aimed at tackling the coronavirus crisis – including a promise to give the NHS whatever resources it needs – the Chancellor said he would ensure staff like senior doctors making up to £200,000 a year can work extra hours.

It will do this by raising two key thresholds at which tax penalties kick in for higher earners – but reduce pension tax breaks to a virtually token sum for those on £300,000 plus a year.

The Government’s move means that from April, 98 per cent of consultants and 96 per cent of GPs will no longer be hit by tax bills due to the hated ‘taper’ – but it shunned widespread calls to abolish the complicated rule altogether.

Chancellor Rishi Sunak also ditched rumoured plans for a £10billion raid on pension tax perks for higher earners.

This would have seen Government top-ups into retirement savings pots slashed to basic rate for everyone, but the controversial move appears to have been dropped following stiff opposition.

The change to pension tax rules for higher earners involves raising the levels at which their £40,000 annual allowance – the amount everyone can save into a pension each year and benefit from tax relief – starts ‘tapering’ down to £10,000.

The threshold income level, where people’s annual earnings start being calculated for the purposes of pension tax relief, will be raised from £110,000 to £200,000.

Meanwhile, the annual allowance will only start being tapered down for people with an adjusted income level – which includes pension contributions – of $240,000, up from £150,000 at present.

For those with adjusted income of £300,000 or more, the taper will reduce the annual allowance to just £4,000.

Meanwhile, a mooted plan to offer doctors more pay instead of pension contributions to stop them refusing overtime work will be dropped. 

Finance industry experts welcomed the changes, but many said the Government should have simply axed the ‘taper’.

Svenja Keller, head of wealth planning at Killik & Co, said: ‘The change to pension rules for doctors – with more clarity and support for their annual allowance conundrum – is great news and, at long last, should be a significant boost to frontline healthcare.

‘That said, by trying to help NHS doctors the increase in allowance threshold is now applicable to everyone. Why not just abolish it?

‘This would have brought far more simplicity and the threshold is now so high that it will take many out of the tapering regime regardless.’

Clare Moffat, head of business development at Royal London, said: ‘The Chancellor’s decision to raise the threshold at which the tapered annual allowance kicks in is welcome but the pension tax system remains overly complex.

‘In reality the Chancellor has missed the ideal opportunity to massively simplify the system by removing the taper altogether.’