Looks at the annual allowance and lifetime allowance - which limit the amount that can be saved tax-free in a pension - and the reductions in those allowance since 2010Jump to full report >>
Pension tax relief works on the principle that contributions to pensions are exempt from tax when they are made, but taxed when they are paid out. Pension contributions made by individual employees are usually paid out of pre-tax salary, so tax relief is received at the individual’s marginal tax rate. The main limits that apply are the lifetime allowance (LTA) and annual allowance (AA). At introduction in 2006, the AA was set at £215,000 and the LTA at £1.5 million (Finance Act 2004, s218 and 228). Both were set to increase in stages, with the LTA reaching £1.8m and the AA £255,000 by 2010 (Budget 2004, para 5.45). Since 2010, both allowances have been reduced:
Measures were introduced to mitigate the impact of these reductions – for example, enabling individuals to protect a higher level of LTA in certain circumstances and allowing them to carry forward unused annual allowances from the previous three years.
The Government says this has reduced Exchequer costs and the share of pensions tax relief going to additional rate taxpayers. (Cm 9102, July 2015, para 1.5 and 2.6.)
The impact of these reduced allowances on some public servants – including the senior military, the judiciary, and NHS consultants and GPs – has featured in successive reports of the pay review bodies (See, for example, Cm 9694, Sept 2018, para 3.89-90).
In a Westminster Hall debate on 3 April 2019, Paul Masterson raised concerns about the impact on GPs and senior doctors, surgeons and consultants in the NHS. In particular, the tapered annual allowance was resulting in “many consultants being hit with unexpected five-figure tax charges.” Health and Social Care Minister Jackie Doyle Price acknowledged that the tax rules were clearly having an “impact on the behaviour of practitioners,” increasing voluntary early retirements, for example. In response to concerns, the NHS had extended its voluntary “scheme pays” facility (where the scheme member can opt for the charge to be paid from the capitalised value of their pension) to cover tax charges of less than £2,000. Although the Government would consider further changes, she did not think there was a case for exempting high-earning NHS staff from the rules (c327).
The debate on wider reforms and information on the cost and distribution of pension tax relief is in Library Briefing Paper CBP 7505 Reform of pension tax relief (October 2018). The money purchase AA (now £4,000) which applies after an individual has accessed their pension savings flexibly is discussed in section 4.7 of Library Briefing Paper CBP-6891 Pension flexibilities: the ‘freedom and choice’ reforms (September 2018).