PENSIONS INSIGHT
Taxing times for high-earners Alan Morahan, managing director DC Consulting, at Punter Southall Aspire, analyses research findings and suggests measures to stop high- earners sleepwalking into higher tax bills
I n April 2016, tax legislation was introduced that affects many high- earning employees. Key changes include: ● reduction in the lifetime allowance from £1,250,000 to £1,000,000, and ● introduction of a taper which reduces the annual allowance (AA) by 50p for every £1 of income between £150,000 and £210,000, to a minimum of £10,000. Are employers helping employees get to grips with these changes, and what support have they been providing? Our research, published in the report Taxing times for high-earners , highlights that whilst some employers are providing high levels of support for employees, many are not and consequently there will be some high-earners potentially sleepwalking into higher tax bills. A third of employers (32%) have not provided any additional flexibility for their employees and over a fifth (21%) are not allowing employees to take cash in lieu of pension contributions. Some employees are either continuing to make their pension contribution, which could lead to a potential tax liability, or have ceased their contributions altogether without receiving any cash allowance in lieu of the employer’s contribution; but some are oblivious to the implications of the tax changes. Our research suggests that employers are handling the tapered allowance differently too; for example, 28% of companies have simply capped contributions at £10,000. Whilst this ensures the tapered AA limit is not breached, this blunt approach might not be the best option for all employees. The full taper only applies when an employee’s total income reaches £210,000. Anyone earning less might be able to contribute more tax-free and there maybe unused pension tax relief from previous years which could be carried forward too. More variations were evident in the way employers treat National Insurance
contributions (NICs) when a cash allowance is paid. Whilst over half of companies (52%) said they deduct the cost of the employer (secondary) NICs at 13.8% from the cash allowance, 48% said they don’t – so some employers are shouldering the cost, and in other cases employees are picking up the bill. ...some employees will need to make changes So what can companies do to help their employees understand their options and what support could the payroll and pension function be providing? The first issue is whether there has been enough communication about the tax changes and the likely implications for high earners. If not, consider hosting a presentation or webinar to ensure everyone has the information they need and the opportunity to ask questions. Giving employees access to a pension consultant to answer specific queries and help with calculations is another sensible option, especially given there is an income tax and NICs exemption on employer- arranged pension advice. It is likely some employees will need to make changes to their pension arrangement and there are a number of options available for employers. These include: ● Capping pension contributions – This could be implemented for staff whose employment income, including employer pension contributions (inclusive of salary sacrifice), exceeds £150,000, with the balance of employer pension contributions paid as cash. Capping contributions at £10,000 will ensure the tapered AA is not to their pension arrangement...
breached (provided the employee is not making pension savings elsewhere). A different approach would be to cap contributions at a level agreed with the employee (between £10,000 and £40,000), based on expectation of how the tapering will affect them. However, this approach may not be as effective at mitigating fully the risk of breaching the AA, plus it would be administratively more complex to implement and is potentially open to abuse as a means of claiming cash allowance over pension. ● Offer a cash alternative – Employers could consider offering cash payments in lieu of pension contributions, which many high- earners are now favouring. This could be: a gross amount equal to the unpaid pension contribution with no adjustment; an amount netted down to reflect the additional cost of employer NICs; or an amount grossed up to reflect the cost to the employee of the income tax and NICs incurred on the cash amount. For members with protection from the lifetime allowance charge, a full cash- alternative to pension could apply. ● Bring forward bonus payments – One of the challenges for employees is calculating their ‘adjusted income’ and tapered AA, especially where substantial bonuses are paid towards the end of the tax year. One way around this is to pay bonuses earlier to give employees greater clarity over their total end-of-tax-year income position and facilitate effective planning of their allowances. ● Extending flexible benefits – Another option is to include the value of employer pension contributions within an optional benefits package, which allows the employee to flex pension contributions for alternative benefits if it works out more favourably. Whilst companies don’t have a legal obligation to provide this kind of advice to their employees, we believe payroll and pensions departments should be offering this as a matter of course. n
| Professional in Payroll, Pensions and Reward | February 2016 | Issue 26 38
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