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Pension tax relief works on the principle that contributions to pensions are exempt from tax when they are made, but taxed when they are paid out. Pension contributions made by individual employees are usually paid out of pre-tax salary, so tax relief is received at the individual’s marginal tax rate. The main limits that apply are the lifetime allowance (LTA) and annual allowance (AA).  At introduction in 2006, the AA was set at £215,000 and the LTA at £1.5 million (Finance Act 2004, s218 and 228). Both were set to increase in stages, with the LTA reaching £1.8m and the AA £255,000 by 2010 (Budget 2004, para 5.45). Since 2010, both allowances have been reduced:

  • The LTA reduced from £1.8m to £1.5m in April 2012, then to £1.25 million in 2014 and £1 million in April 2016. Since April 2018, it has risen in line with inflation and will be £1,055,000 in 2019/20.
  • The AA reduced from £255,000 to £50,000 in April 2011 and then to £40,000 in April 2014;
  • People with defined contribution (DC) pensions pots;
  • From April 2016, there is a tapered AA for individuals with ‘adjusted income’ over £150,000.

Measures were introduced to mitigate the impact of these reductions – for example, enabling individuals to protect a higher level of LTA in certain circumstances and allowing them to carry forward unused annual allowances from the previous three years.

The Government says this has reduced Exchequer costs and the share of pensions tax relief going to additional rate taxpayers. (Cm 9102, July 2015, para 1.5 and 2.6.)

The impact of these reduced allowances on some public servants – including the senior military, the judiciary, and NHS consultants and GPs – has featured in successive reports of the pay review bodies (See, for example, Cm 9694, Sept 2018, para 3.89-90). The BMA is concerned that the rules are “forcing some of our most experience doctors to retire, reduce their workload, abandon leadership positions and stop covering vacancies.” It has called for a “fundamental review of the current legislation around the annual and lifetime allowances” and has suggested some immediate and medium-term mitigations in the meantime (Letter to Chancellor, 20 April 2019).

The Government is considering additional flexibility in public service pension arrangements (PQ 255267, 21 May 2019). The interim NHS people plan published on 3 June 2019 proposes allowing senior NHS clinicians the option to halve the rate at which their NHS pension grows in exchange for halving their contributions to the scheme. The BMA says this will not solve the problem and has called for reform of the pension tax allowances.

The debate on wider reforms and information on the cost and distribution of pension tax relief is in Library Briefing Paper CBP 7505 Reform of pension tax relief (October 2018). The money purchase AA (now £4,000) which applies after an individual has accessed their pension savings flexibly is discussed in section 4.7 of Library Briefing Paper CBP-6891 Pension flexibilities: the ‘freedom and choice’ reforms (September 2018).

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