08 Feb 2017
You may be aware that from 6th April 2016 there were changes made to pensions that will affect higher earners.
Contributions made this tax year are restricted to as little as £10,000 for those with £210,000 of earnings. However, because of how the rules work, they can affect those with income as low as £110,000 from all sources. As such if for example you are providing an employer pension contribution of 5% for such an employee, they could very well have a problem but this would also be the case if the contributions were on a matched 3% of salary basis.
From 6th April 2016 the Annual Allowance (the amount that can be contributed to a pension and receive tax relief) reduced for higher earners. Very simply, these individual’s Annual Allowance has reduced by £1 for every £2 of income they have above £150,000. Some examples are shown below:
- Income of less than £150,000 their Annual Allowance is £40,000
- Income of £170,000 their Annual Allowance is £30,000
- Income of £190,000 their Annual Allowance is £20,000
- Income of £210,000 or more their Annual Allowance is £10,000
The income is from all sources and will be adjusted if your employer makes large pension contributions.
Income over £110,000?
Whilst the rules may first appear to affect only those earning over £150,000 they can affect those who have income as low as £110,000 from all sources.
This is because individuals will have a lower annual allowance for this tax year if both the following apply:
- their‘threshold income’ is over £110,000 – this is their income excluding any pension contributions (unless they’re paid as a salary sacrifice by your employer)
- their ‘adjusted income’ is over £150,000 – this is their income added to any pension contributions they make out of gross pay or their employer makes
The salary sacrifice must have been in place before 9th July 2015, and there are some other quirks of the rules beyond the scope of this communication.
Therefore if an individual has income from all sources of less than £110,000 they are not affected by these changes.
If individuals have unused pension Annual Allowance in the previous 3 tax years then potentially, for a limited period of time, carry forward may be an option to enable contributions in excess of the new April 2016 allowance limits to be made without a tax liability arising. However, even if carry forward is available it will only ever have very limited availability.
We recommend employers review the pension contribution situation for employees earning £110,000 or more and certainly for those earning over £150,000. Depending on the individual employee’s circumstances your employer pension contribution could see the employee receiving an unexpected tax bill, which would at best question the value of them having a company pension contribution (as opposed to additional salary or another form of employee benefit).
If you would like assistance in this area please contact your usual Wingate contact or one of our strategic benefit consultants on 01883 332260 or at firstname.lastname@example.org.
This information is based on our current understanding of legislation which can change without notice. Professional advice should always be sought prior to making any changes to your arrangements or deciding on any action in this respect. This information should NOT be treated as personal advice or recommendation.