Civil service union Prospect has saluted chancellor Rishi Sunak’s decision to set aside £2bn to reform pensions rules that penalise employer contributions made to some of the public sector’s highest earners.
Sunak’s first Budget reset the limits on the so-called pensions taper thresholds which professionals’ union Prospect said had cost 289 senior officials in Whitehall more than £6m in 2017-18 – the most recent tax year for which figures are available.
Less than a month since he became chancellor following predecessor Sajid Javid’s surprise resignation, Sunak U-turned on some of the changes made since 2010 that were introduced to treat high-earners’ pension contributions as income. Progressive cuts to the tax-free allowance for pensions contributions have also seen it cut from £255,000 a year in 2011-12 to £40,000.
Reports in January suggested that the Treasury was looking to raise the salary threshold for treating pension contributions so that it only caught those earning £150,000 or more rather than the current £110,000. However the chancellor actually raised it to £200,000 – meaning that employees can earn that figure and accrue £40,000 in contributions before the tax-trap kicks in.
The most high-profile examples of public sector employees affected by the current situation are senior NHS doctors, who were widely reported to be turning down overtime shifts because of the tax impact that extra pension contributions from additional earnings would have.
Sunak directly referred to doctors’ concerns in announcing his reforms yesterday – but hundreds of civil servants are also taxed on their pension savings, according to the research Prospect shared with CSW last year.
Delivering his Budget, Sunak said: “I’ve listened to concerns, from all sides of this house, that the pensions tax system is preventing doctors from taking on more hours.
“To significantly reduce the number of people that the tapered annual allowance affects I’m increasing both taper thresholds by £90,000, removing anyone with income below £200,000.
“Based on their vital work for the NHS, that will take around 98% of consultants and 96% of GPs out of the taper altogether.”
Sunak added that he was also reducing the minimum annual tax-free allowance for pensions to £4,000 – a move that would only affect those with incomes above £300,000. The current minimum is £10,000.
Prospect deputy general secretary Garry Graham said Sunak’s reforms were “overdue but welcome” and had only arisen through campaigning by the union and other organisations.
“The chancellor has finally realised that it is totally unfair for people who have dedicated their life to public service – senior fire fighters, senior civil servants and air traffic controllers – to be out of pocket and have to choose between taking a promotion and losing thousands in pay,” he said.
As a result of the changes, which will take effect from the 2020-21 tax year, the “tax trap” will not affect people with an “adjusted income” of up to £240,000.
At present, once people earn more than £110,000 a year, pension contributions are included in their total income, alongside their salary, for the purposes of applying the taper.
Prospect’s research last year showed that 289 civil servants paid tax on their pension savings in 2017-18 – suggesting they had fallen into the tax trap.
The union said tax of £6,016,923.05 had been paid through the Civil Service Pension Scheme over the same period.
The HM Treasury Red Book said the proposals would cost £180m in 2020-21. It added that previous plans to offer greater pay in lieu of pensions contributions to senior clinicians in the NHS pension scheme were not being taken forward.