A reduction in pension tax relief could bring thousands more public sector workers into the taxman’s net, potentially setting up a showdown with unions, AJ Bell has warned.
With spending pledges for the NHS in mind, commentators have said in recent weeks that one of the most likely courses of action will be for the chancellor to cut the annual allowance at the forthcoming Budget.
Given current accrual rates, public sector workers would need to be earning over 150,000 to be affected by the annual allowance. However, AJ calculates that if it was reduced from £40,000 to the £30,000, those earning £115,000 would be hit.
With a reduction in the annual allowance to £20,000, the salary threshold would fall to £80,000.
AJ Bell senior analyst Tom Selby says: “While very few private sector workers would be constrained by a £20,000 yearly allowance, hundreds of thousands of public sector staff would likely be caught.
“We are not talking about the super-rich here – many doctors, head teachers and senior civil servants who might not dream their pension would be worth this amount risk being hit. If they breached the annual allowance limit, HM Revenue & Customs would claw back any tax relief received above this level.
“Clearly a salary of £80,000 is more than decent, but anyone earning around this amount who has a mortgage to pay off or a family to support probably doesn’t consider themselves particularly wealthy.
“This presents a very real dilemma for Phillip Hammond and the Treasury as they prepare next week’s Budget. Cutting the annual allowance could undoubtedly raise valuable short-term revenue to help fill the £20bn NHS funding gap.
“In doing so, however, he would risk a backlash from trade unions across the public sector – including, ironically, those representing senior NHS employees.”