12 March 2020
The biggest news in yesterday’s Budget for the pensions world was the announcement of changes to the Annual Allowance. Karen Goldschmidt looks at why this is both good and bad news and some of the urgent actions that employers might need to take for their highest earning employees.
The Annual Allowance is normally £40k, but for high income individuals it can be reduced (the so called “taper”) possibly down to as little as £10K (depending on the individual’s taxable income and pensions savings built up in the tax year). Where pension savings made by and for an individual exceed the Annual Allowance in a tax year, additional personal tax charges are triggered.
In yesterday’s Budget the Chancellor announced changes that will come into effect from 6 April and it is good news for most. From tax year 2020/21 those on incomes of £200K or less do not even have to think about the taper – they have the full £40,000 Annual Allowance. And most of those still in the “taper zone” will have a better Annual Allowance than before.
If you are an employer, the changes are mostly helpful, reducing some administrative burden. It will mean that from April onwards, many senior employees personal tax affairs will be easier, and fewer will be caught by a surprise tax bill. You might also find that some individuals who opted for cash in lieu of pension contributions, or for cash plus contributions limited to £10k pa, wish to increase pension contributions.
But what about your highest earners?
That’s the good news, but the sting in the tail, and raising some urgent issues, is that for the highest earners (those with income plus pension savings in the tax year of more than £300K), the reduced Annual Allowance will be lower than £10K and more likely to be as low as £4k.
You might also need to make urgent changes for your highest earners to avoid them walking into an unexpected £2,700 tax bill for 2020/21.
There are fewer than 25 days until the new tax year starts which doesn’t leave much time to agree any changes. The saving grace is that the number of individuals impacted is likely to be small. Your focus might be your employees still building up pensions savings (whether DC or DB) if they are expected to earn more than £250K just in case any other income and pensions savings take them into the worst Annual Allowance levels.
For those in a DC scheme, if necessary, you could probably implement the change within the first few months of the tax year (stopping contributions before they reach £4k) – taking care to true everything up. In the DB world, some of those affected in this way may take it on the chin – they are happy to have DB accrual and manage the extra tax bill as it arises. But that’s less likely if you have carefully set up “£10K cap and cash in lieu” arrangements to avoid charges. Adjusting for a £4K AA cap may involve scheme rule changes to be agreed and signed by the employer, trustees and affected members before 6 April – which is a lot to do in less than 25 days.
While it is good news that many high earners have been lifted out of the fiendishly complicated taper, it would have been so much simpler if Rishi Sunak had abolished the taper altogether!
For more details see our technical note HERE