Budget 2020: What did the Chancellor say about pensions?
Published on 12th Mar 2020
On 11 March 2020, the new Chancellor of the Exchequer delivered the Budget. It comes at a time when the UK is negotiating its future relationship with the EU and other countries and the coronavirus is causing public health and economic concerns. The Budget contained a series of pledges in connection with the coronavirus and public spending, but what did the Chancellor have to say about pensions?
Annual allowance change
The tapered annual allowance has been having a serious impact on senior clinicians in the NHS, with many doctors refusing additional work. Other public services have also raised concerns about the taper.
With temporary fixes for the NHS in place for the current year, the Budget report confirms that "HM Treasury has reviewed the tapered annual allowance and its impact on the NHS, as well as on public service delivery more widely" and announces the following changes to the taper to take effect from the 2020-21 tax year:
- threshold income will increase from £110,000 to £200,000;
- adjusted income will increase from £150,000 to £240,000; and
- where the taper bites, the minimum annual allowance will be £4,000 (instead of £10,000). The report says that, in practice, an annual allowance of £4,000 will apply to people with total income, including pension accrual, in excess of £300,000.
The new income thresholds look to have been set very much with the public sector in mind. In his speech, the Chancellor confirmed that they would take 98% of NHS consultants and 96% of GPs out of the taper altogether.
However, there is nothing in the Budget report or related policy paper to suggest that the changes are limited to the public sector. As such, it looks as though they will apply in the private sector too.
The Overview of tax legislation and rates, confirms that the necessary legislative provisions will be included in the Finance Bill 2020, which is due to be published on 19 March 2020.
Lifetime allowance increase
As expected, the Budget report confirms that the lifetime allowance will increase in line with the Consumer Prices Index and be £1,073,100 for the 2020-21 tax year.
Review of net pay and relief at source
In its election manifesto, the government pledged to conduct a "comprehensive review" of the way that pensions tax relief works for the lowest earners. Where a net pay arrangement is used, people who do not earn enough to pay income tax get no tax relief on their pensions contributions. In contrast, where relief at source is used, they get relief of 20%.
The Budget report confirms that the government will "shortly publish a call for evidence on pensions tax relief administration".
Changes to the RPI
In January, the former Chancellor confirmed that the expected joint consultation between the government and UK Statistics Authority (UKSA) on a proposed change to the Retail Prices Index (RPI) to bring it into line with the Consumer Prices Index including owner occupiers' housing costs (CPIH), would launch at Budget 2020.
The consultation is a joint one because the Chancellor's consent is needed to any "fundamental" change to the RPI which would be "materially detrimental" to the holders of "relevant gilts". These gilts were issued until 2002 and the Treasury must offer to redeem them in the event of a "fundamental" and "materially detrimental" change to the RPI. The last relevant gilt will expire in 2030 and, after that point, the UKSA will not need the Treasury's consent to make changes to the RPI.
This consent requirement divides the consultation. The Chancellor is seeking views "on the potential impact of the Authority's proposal on the holders of index-linked gilts and potential broader impacts on the index-linked gilt market" and whether the change to the RPI should take effect in 2030, or at another date between 2025 and 2030 (and, if so, when). The UKSA is seeking views on its "proposed technical approach … to transition between the current and new methods and data sources of RPI", in other words, on the technical method it intends to use to bring the methods and data sources of the CPIH into the RPI. Both the Chancellor and the UKSA are also asking for evidence as to the wider impact of the proposed change to the RPI and of ceasing publication of sub-indices of the RPI to "inform future policy decisions", but warn that it is "unlikely to be relevant to any decision that the Authority is minded to make as regards addressing the shortcomings of the RPI or that may fall to the Chancellor".
The consultation will remain open until 22 April 2020 and the government and the UKSA intend to respond to it before the Parliamentary summer recess.
Preferential creditor change delayed until December
In the Autumn Budget 2018, the then Chancellor announced that the law would change to make HMRC a preferential creditor for taxes that a business collects from employees or customers, but does not pay across to HMRC, before becoming insolvent. These taxes include PAYE, employee NICs and VAT.
This change, which could reduce the amounts available to pension schemes as unsecured creditors, was originally due to apply from 6 April 2020. However, the Budget report states that it will now take effect from 1 December 2020 and extend to Northern Ireland. Legislation will be introduced in the Finance Bill 2020.
State pensions for opposite-sex civil partners
The Budget report confirms that, following the recent change in the law to allow opposite-sex couples to form a civil partnership, "the Budget provides funding which ensures individuals can derive or inherit a State Pension from an opposite-sex civil partner".
Collective money purchase schemes
The Overview of tax legislation and rates, says that the "government will legislate to ensure that collective money purchase schemes, to be introduced by the Pension Schemes Bill 2019-20, can operate as registered pension schemes for tax purposes. The change will have effect after Royal Assent of the Pension Schemes Bill 2019-20."
Osborne Clarke comment
While there has been a lot of speculation about what the Chancellor might do in relation to pensions tax, it looks as though he has focussed on the immediate priority of addressing the impact of the annual allowance taper on the NHS. It remains to be seen whether the government will take a wider look at pensions tax in the future, perhaps when there is less pressure on other fronts.
Beyond this, the pensions-related announcements in the Budget were all as expected.
Pension scheme trustees and employers should discuss the change to the annual allowance with their scheme administrators and consider whether they need to update scheme documents. They should also discuss the consultation on the changes to the RPI, and how the changes will affect their scheme, with their advisers. The consultation paper says that, since 2010, RPI has been "on average one percentage point per annum above the CPIH", but that this is not fixed. In view of the potential impact, some schemes might also like to respond to the consultation.