The Spring Budget 2020 and Your Pension
Against the backdrop of an intensifying coronavirus crisis and a historic market rout, Chancellor Rishi Sunak today delivered an appropriately momentous Spring Budget.
The Budget announced the largest increase in borrowing in 30 years and thus marks the end of austerity.
It promises £30bn of spending, £12bn of which is intended to combat the economic shock from coronavirus. The Bank of England also used an emergency rate cut to reduce the base rate by 0.50% to 0.25%, in what seems to be co-ordinated action on the monetary and fiscal policy fronts.
While powerful measures to boost the economy were announced – including backstopping loans to small businesses and reductions in business rates – the Budget was fairly light on the pension front. The announced changes did not deviate much from expectations.
Going into the Budget there were rumours about the removal of tax relief for higher and additional rate earners but the Chancellor ultimately opted against this – though it is worth keeping an eye on this should it ever resurface.
The only noteworthy changes ended up relating to the tapered annual allowance – which impacts high earners in the NHS among others – and changes to the National Insurance (NI) contribution thresholds which impact State Pension eligibility.
Tapered Annual Allowance Changes
The tapered annual allowance impacts high earners by reducing their annual allowance. The allowance dictates how much can be contributed to a pension before tax relief is withdrawn.
Previously, it would kick in if both ‘threshold income’ (essentially regular earnings) was above £110,000 and ‘adjusted income’ (essentially regular income plus pension contributions) was above £150,000. The allowance was reduced by £1 for every £2 above the £150,000 threshold, down to a minimum of £10,000.
This led to some significant problems, particularly in the NHS. Since pension contributions are often determined by the amount of time worked, well-paid staff reduced working hours (or stopped working altogether) in order to reduce pension contributions and avoid hefty tax bills.
In order to fix this, the tapered annual allowance thresholds were increased by £90,000 as of 2020/21 (so adjusted income must now be above £240,000 for the taper to kick in) while the minimum allowance was reduced to £4,000.
These changes relieve some pressure as 98% of consultants and 96% of GPs would no longer we caught by the taper but some argue that they don’t fix the underlying problem.
High earners in the NHS (whose pension contributions are often inflexibly bound to their income) often have no choice but to reduce work to avoid breaching limits. To add to this, since the amount of pension contributions in the year factors into adjusted income and thus influences the size of the taper, it is very difficult to effectively plan ahead. As such, there were calls for fully abolishing the taper.
National Insurance Threshold Changes
As promised during the election campaign, the primary threshold (PT) for National Insurance contributions will be raised to £9,500 in 2020/21, from the current £8,632. This is the amount above which NI contributions are due.
When the policy was first put forward there was some concern that fewer people would be eligible for the State Pension as it was unclear whether the lower earnings limit (LEL) would also be raised. The LEL is the amount above which workers receive the benefits of NI contributions (including the State Pension) without actually paying them.
However, the Budget kept the LEL unchanged (only rising with inflation). By not raising the LEL in line with PT the government delivered a tax cut of roughly £100 for most workers while maintaining State Pension eligibility at the same level.