Employee benefit specialist Secondsight has urged employers to help their staff understand what the tax implications are in respect of the lower annual and lifetime allowances for pensions ahead of the changes in April. Secondsight suggest that high earners could face a tax bill of up to £13,500.
As announced in the March 2015 budget, the amount that can be saved by an individual into a pension without being taxed i.e. the annual allowance from 6 April will be tapered from the £40,000 maximum down to £10,000 per annum for those whose earnings are £150,000 plus.
There may be few employees whose actual salary is £150,000, the definition of earnings is ‘adjusted’ so as to include elements such as employer pension contributions, income that has come from savings bonuses and income from buy-to-let properties this is more likely to bring people into the £150,000 income bracket who may not have considered themselves to be. The effect on the annual allowance is a reduction of £1 of the allowance for every £2 of adjusted earnings above £150,000 until the minimum annual allowance of £10,000 is reached.
Darren Laverty, partner at Secondsight, said ‘many individuals and employers were unaware of the impact of this change.’
‘If employees earning £150,000 or more do not reduce their pension contributions from 6 April, they will be taxed at 45% on any excess and face a surprise tax bill of £13,500 when they submit their tax return,’ he said.
The other change to consider is the reduction in the lifetime allowance down to £1 million in April 2016 from £1.25 million. The impact of anyone exceeding the threshold may well be liable to tax rate of 55% on any amount exceeding the limit if taken as a lump sum payment. However, if the excess is taken as income the tax charge is reduced to 25% but it will also be subject to the recipient’s marginal rate of income tax.
Again, Laverty said ‘few businesses were aware that many employees could reach the lifetime allowance cap. With an annual growth rate of 5 %, any individual with a fund now worth £358,000, but whose retirement is 20 years away, is likely to hit the ceiling.’
‘From now until April, employers have a window of opportunity to communicate the pension changes to their employees, educate them on their options and take action to protect them from the impact of these changes,” said Laverty.
Comment
With the start of the new tax year only a few short months away, now is a good time to start communicating and engaging with employees about their pension. Those who could well find themselves at the higher end of the scale should be seeking good independent financial advice to ensure they do not fall foul of an unwanted tax bill.
