The government is considering effectively increasing the amount people can save in their pension before paying tax in a bid to close a contribution tax trap that has cost top civil servants £6m.
It has been reported that the Treasury will tweak the pensions allowances rules to stop counting pension contributions as income.
After a number of reductions in how much people can save into their pension, many senior public sector workers faced a choice of paying extra tax or reducing their hours, with senior doctors in the NHS reportedly cutting their hours.
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In 2011-12 the tax-free allowance was cut from £255,000 a year to £50,000, followed by a further cut in 2013-14 to £40,000. An additional taper rate was introduced for those earning above £150,000 in 2016-17, which meant the limit could be as low as £10,000 for those earning £210,000 or more.
In addition, once people earn more than £110,000, then pension contributions are included in their total income, alongside their salary, for the purposes of applying the taper. This meant some senior civil servants' and top doctors' contributions exceeded the tax-free allowance, landing them with an extra tax bill. Figures obtained from the Cabinet Office by the Prospect trade union in August showed that 289 senior civil servants paid additional tax worth a total of £6,016,923.05 through their pension scheme.
The latest plan, briefed to The Times, pension contributions would not be counted as income for people earning up to £150,000 in an effort to effectively remove public servants from the scheme. This comes after the Department of Health and Social Care agreed to reimburse clinicians amid fears extra tax bills could stop doctors working.
The paper has also reported that ministers are considering the creation of a watchdog similar to the Office for Budget Responsibility to oversee pension savings in order to prevent a repeat of such problems.
Prospect's deputy general secretary, Garry Graham, said the union was pleased that the government was trying to “solve this issue not just for doctors but for leaders and senior professionals across the public sector”.
He added: “The reported proposals outline a change in the thresholds of the tapered annual allowance which would ensure that the policy affects people who genuinely earn more than £150,000. This will mean the taper will rightly affect high earners such as bankers without affecting doctors, air traffic controllers and chief fire officers.
“That said, the government does need to take action to remedy the imbalance in the benefit of tax relief between those on the highest and lowest earnings. We urge government to tackle anomalies that see the lowest earners unfairly not receiving any tax relief on their pension contributions.”