Pension allowances could still bite for some higher-paid workers

The Association of Taxation Technicians (ATT) has welcomed reforms to pension limits intended to keep key staff such as NHS doctors in the workforce, but warned that some individuals could still see tax charges.

At today’s Budget, the Chancellor relaxed the pension restrictions and charges which are believed to have discouraged some high earning employees, such as NHS doctors and consultants, from remaining in work due to tax charges on annual contributions to their pension funds and on the total value accumulated at the time they start drawing their pensions.

The Chancellor announced that the Lifetime Allowance, which restricts the amount individuals can accumulate in their pension fund before they incur a tax charge, will now be abolished, while the annual limit¹ on tax-free contributions which can be made to a pension fund (the Annual Allowance) will also be increased from £40,000 to £60,000 from 6 April 2023.

Senga Prior, chair of ATT’s Technical Steering Group, said:

“Since April 2020, for high earners with ‘adjusted income’ (a figure calculated as broadly their total earnings plus pension contributions) of over £240,000, the Annual Allowance has been progressively tapered to a minimum of £4,000. Any pension input in excess of this amount resulted in an income tax charge of up to 45%, or 46% for Scottish taxpayers. This created a clear disincentive to continue working, especially for senior NHS doctors and consultants, many of whom have ‘final salary’ or defined benefit pension schemes.

“The revisions contained in the Budget not only increase the Annual Allowance itself, but also increase the income level at which the Annual Allowance is tapered from £240,000 to £260,000. The minimum tapered Annual Allowance is also set to increase from £4,000 to £10,000.

“We are pleased to see the Government taking action to remove what has proved to be a real issue for senior doctors.  However, it should be remembered that the very highest earners could still see a tax charge.

“Alongside encouraging senior staff to remain at work, a further pension reform included in the Chancellor’s Budget proposals aims to reduce a disincentive for people who have already retired from returning to work. Where an individual has retired and has already accessed their pension fund, the amount they can then contribute to any pension without incurring a tax charge is capped at £4,000.

The proposal to increase this to £10,000, matching the minimum tapered Annual Allowance, should provide greater freedom for pensioners to return to work and continue contributing to a pension fund.”

Notes for editors

1. HMRC policy paper: Pension Tax Limits.