Government tax advisers call for review of pensions tax taper

A new report by the Office of Tax Simplification says the government should review 'any distortions' that stem from the pension annual allowance. 

The government's independent tax advisers have called on the government to review "any distortions" that stem from the pension annual allowance.

In a new report, the Office of Tax Simplification (OTS) urges the government to review the controversial existing pensions tax taper arrangements, which have been brought into the spotlight following warnings from the British Medical Association (BMA) that NHS doctors will start reducing their working hours to avoid being hit by stealth taxes.

In August, the government announced it would review the annual allowance taper for doctors, but in a move that was widely criticised, it stopped short of considering changing the rules for other high earners.

In the report, the OTS said:

"The government should continue to review the annual allowance and lifetime allowances and how, in combination, they deliver against their policy objectives, taking account of the distortions (such as those affecting the National Health Service) they sometimes produce."

Under the taper system introduced in the 2016/17 tax year, high earners with an income above £150,000 are severely restricted in regard to how much they can save into their pensions. Their £40,000 annual allowance is reduced by £1 for every £2 of income above £150,000, with a maximum reduction of £30,000. Therefore, anyone earning more than £210,000 can pay only £10,000 into a pension each year.

These restrictions combined with the pension lifetime allowance, which stands at £1.055 million, have led to some doctors opting to retire early or reduce their hours. Those who breach the lifetime allowance are heavily penalised, with punitive tax charges of 55% due on money above the limit if it is taken as a lump sum, or 25% if it is taken as income.

Experts, though, are not holding their breath on changes being implemented. Steve Webb, director of policy at Royal London, notes: "Ideally, the government would listen carefully to this report and make changes. But in the past, HMRC has treated OTS recommendations with contempt, 'marking their own homework' and deciding that nothing needs to change. I hope that this time the watchdog will have some teeth and the government will listen."

Elsewhere in the report, the OTS also called on the government to review the Money Purchase Annual Allowance, including whether it is set at the right level and is sufficiently understood. 

The OTS also urged the government to review some of the unintended consequences that have been brought about by the child benefit tax charge for high earners, which kicks in at £50,000. Couples who decide not to claim the benefit – to avoid the onerous admin that comes with paying the charge – will lose out on national insurance entitlements if one parent is a stay-at-home parent (usually the mother). In addition, children of those who have not claimed child benefit will not automatically receive their national insurance number before they turn 16. 

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