March 2020 Budget: Pension Changes

On Wednesday this week the new Chancellor of the Exchequer, Rishi Sunak, delivered his first Budget speech.

The background to this Budget speech was like no other that I can remember.  In the last three months we have had a decisive General Election result, the United Kingdom’s departure from the European Union, widespread and continued flooding across the nation, the unexpected resignation of the previous Chancellor, and of course the arrival and onwards transmission of the feared coronavirus within the UK.  This peculiar set of coinciding circumstances was always likely to lead to a similarly unusual Budget speech.  And indeed that was the case.

For Sunak provided a clear indication that the decade of national austerity is to end in the UK.  The spending taps are being turned-on, for everything from transport and infrastructure to much needed emergency funding to support businesses, the NHS, and the economy during the coronavirus crisis.  All this – and more – was announced in a speech of more than an hour. 

Income v Expenditure

Yet questions remained at the end. 

Aside from the unknowns – particularly around the actual impact of coronavirus and Brexit – there were concerns about how the spending commitments made were to be funded.  Indeed many commentators have already mentioned that there appeared little effort given to match expenditure to income.  The assumption therefore is that much of the initial cost will be met via more national borrowing.  This makes some sense, given that interest rates are once again at historic lows following the Bank of England’s announcement earlier that day. 

But borrowing always has to be paid for eventually.  And it may well be that the addition of a second 2020 Budget date in the autumn will present another opportunity for Sunak to deliver some more challenging messages.  But in the meantime, what did the Budget announcement and supporting documents mean for the world of company-sponsored Pensions and Employee Benefits provision?

The pensions “tax trap”

In truth there were very few changes announced to either, although pensions did make a brief appearance. 

The hot-topic in pensions over the last few months has been the problem of the current system of pensions tax-reliefs which, perversely, have been actively preventing some senior doctors and other workers from taking on additional shifts because of a perceived “tax trap”. 

The official name for this issue is the “tapered annual allowance”, and it currently applies to those earning (broadly) over £110,000 per annum.  Once the threshold is passed, they may be entitled to a lower Annual Allowance for tax-relieved pension scheme savings than those on more modest pay.  This was the issue preventing many senior employees in the National Health Service working extra hours.  This would be a problem at any time, but perhaps becomes even more sensitive and acute given the expected pressures on the NHS in the months immediately ahead.

Sunak’s response was a £90,000 increase in the threshold from £110,000 to £200,000 from 6th April 2020.  This is estimated to take 98% of medical Consultants and 96% of GPs out of the taper-trap altogether.  It is also important to note that this will apply to non NHS workers too.

This is a significant boost for many workers, but it was partially balanced by a reduction in the Annual Allowance for workers earning over £300,000.  Another change was a small increase in the Lifetime Allowance to £1,073,100 from 6th April 2020.

For full details of the proposals please visit HMRC’s web page summarising these changes.

Overall these changes will be broadly beneficial to many UK workers (and the NHS), but presents some new challenges for very high earners who may now need to consider an alternative remuneration strategy.

It’s also interesting that the government overlooked the opportunity to shake-up the entire pensions tax relief system (see my post last month).  In fact the latest change just serves to make an already complex system even more challenging.  So this may be an area that the Chancellor looks at again in his Autumn Budget statement.

Basic Rate Tax Credit

At the other end of the income scale, there remains an anomaly within the current pensions tax relief system which means that some low earners automatically receive basic rate tax relief on their pension scheme contributions (even if they pay no tax), whereas others in a similar position may miss out on this relief. 

Whether or not this tax relief is available is entirely down to the choice of the pension scheme offered by the sponsoring employer, and not something that workers have much or any control over.  This is a clear inequality that needs to be rectified, and government have announced that they will shortly be publishing a call for evidence on this issue.  This is to be welcomed.

The above are all relatively minor - but not insignificant - changes to the existing pensions landscape.  Yet it is still the case that the current system of pensions tax reliefs are still immensely complex for all concerned, and indeed expensive for HM Treasury.  So it remains to be seen if the government will finally grasp this particular nettle and completely reformulate the tax-relief system.  The 2020 Autumn Budget might just be the opportunity to do that.

(Published 13/03/20)

For more information on any of the topics covered, please contact your usual Howden Consultant, or visit our website for further details and contact options.

Steve Herbert

Steve is Head of Benefits Strategy, Howden Employee Benefits & Wellbeing, and is an award-winning thought leader on Pensions, Employee Benefits, and Human Resources issues. He is occasionally accused of making Employee Benefits interesting.

Steve Herbert

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