The UK is finally moving away from a decade of austerity, as the 2020 spring budget has seen spending soar across many different sectors.
The newly appointed chancellor, Rishi Sunak, spent a large part of his speech targeting the current and future impact of the coronavirus and how the government could help people affected.
But the rumoured inheritance and pension tax relief reforms were given much less attention, if any.
Reports that the chancellor could drastically overhaul the inheritance tax (IHT) system by reducing it to 10% with a £30,000 lifetime gifting limit came to nothing.
Little airtime was also given to pensions, with the only measure taken by the UK government being a £90,000 increase in the tapered annual allowance (TAA) to £200,000 ($259,969, €229,008), which is supposed to mainly support doctors who were retiring early to avoid being unfairly hit by higher rates.
At the same time the minimum TAA has been lowered from £10,000 to £4,000.
UK pension lifetime allowance has been raised to £1,073,100, “the minimum they can increase it by under current legislation”,
Rachael Griffin, tax and financial planning specialist at Quilter, said: “The chancellor dodged the intricate maze of complication that is inheritance tax with no mention of any simplification or changes.
“The review of inheritance tax conducted by the Office of Tax Simplification was commanded by Phillip Hammond and it may be the new chancellor doesn’t have any inclination to make changes.
“Although, with the chancellor’s current spending regime, he will have to find money from somewhere and inheritance tax or pension tax relief may be the source of the magical money tree that was used to fund this budget.”
Lost opportunity
Nilesh Shah, specialist in executive pensions at Barnett Waddingham, said: “Tinkering around the edges of pensions taxation is not going to solve the issues. The government have not gone far enough to ‘get this done’.
“While some of the high earners will see their [annual allowance] tax bills reduced by up to £13,500 net; four years after its introduction the complexities are still there.
“The chancellor should have got rid of the complex TAA.”
But Neil Jones, market development manager at Canada Life, told International Adviser the TAA changes will benefit a slightly wider group of people
“The changes […] are not just for NHS staff or doctors, but it appears to apply to everyone – so an estimated 250,000 people,” he said.
“As for IHT – disappointing that they did not take the opportunity to simplify, for example absorb the [residence nil rate band (RNRB)] into the standard nil rate band which would be simple and effective.
“An advantage of the current IHT regime is that it allows planning opportunities, so it is business as usual.
“The impact of coronavirus is obviously high on the government’s priority list, and rightly so. This seems to have driven a lot of what the chancellor of the Exchequer said and changed the priorities, so reform could happen in the future,” he added.
Still too complex
Changes to the TAA, however, do carry some implications, warned Les Cameron, pensions and tax expert at Prudential UK.
“The increased threshold limits will be welcomed by many as this should lift all but the highest net worth individuals out of the ‘taper trap’.
“Having said that, we are still left with a complex piece of pension legislation.
“Reducing the taper charge to £4,000 will see an increase in the annual allowance charge of £2,700 for those who are fully impacted – those with adjusted income of over £312,000,” he said.
“However, annual allowance (AA) charges will still apply. Many of those affected by the old limits were also over the standard annual allowance.
“This change will see a reduction in AA charge of at least £12,000 for these people which will be welcome news,” Cameron added.
Small victory?
Steven Cameron, pensions director at Aegon, said that while NHS staff will benefit from the measures, it still doesn’t get rid of a very difficult system.
“While it’s disappointing that the chancellor didn’t simply scrap the dreaded ‘tapered annual allowance’, the £90,000 increase in the earnings threshold when it kicks in – now £200,000 – is greater than expected and should offer comfort to many more higher earners that they shouldn’t be affected.
“But for those earning above £300,000, an annual allowance of just £4,000 surely makes pensions redundant for them.
“Budget 2020 rightly focused on the nation’s health and economic resilience in response to the coronavirus.
“So, it’s perhaps not surprising that the single pensions change was designed to stop senior NHS professionals turning down extra work or retiring early to avoid a pensions tax penalty.
“The change applies across all occupations and not just to NHS professionals, avoiding making pensions allowances occupation specific.
“Unfortunately, simply moving the thresholds misses the opportunity to start to simplify the fiendishly complex system of pension limits and allowances.
“This may be something the chancellor returns to in a future budget, ideally as part of a wider consultation on how to reform pension tax reliefs,” he added.
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