New research from Punter Southall Aspire, the workplace pensions and savings experts, reveals huge inconsistencies in the support being provided by financial services companies to their high earning employees to help them navigate through the recent tax changes.
In April this year, the government reduced the lifetime allowance from £1.25m to £1m, and introduced a taper to the annual allowance. These changes placed a greater number of high earners at risk of receiving a surprise tax bill on any additional savings.
The research looked at how financial services firms have reacted to these changes six months on and found that whilst some firms are helping their employees, others are falling short.
A third of employers (32 per cent) said they have not provided any additional flexibility for their employees and over a fifth (21 percent) are not allowing employees to take cash in lieu of pension contributions.
Alan Morahan, Managing Director – DC Consulting at Punter Southall Aspire said,
“The fact is that a third of financial services companies haven’t provided any additional flexibility to their employees in light of these tax changes is worrying. Many employees are in the dark about their options. They are either continuing to make their pension contribution, which could lead to a potential tax liability or have ceased their contributions altogether, without any cash allowance in lieu of their employer contribution. Some are oblivious to the implications of the tax changes and are sleepwalking their way towards a substantial and unexpected tax bill.”
Morahan highlights that even when the lifetime allowance was set at £1.25m many employees were unwittingly affected. In September, HMRC confirmed that tax collection from pension holders who had exceeded the £1.25m pensions lifetime allowance reached £126m in the 2015-2016 year – an increase of 62 per cent from £78m collected in 2014-2015.
A recent Freedom of Information request also showed that 449 people whose pension funds breached the lifetime allowance in 2015-2016, were handed a 55% tax charge for taking the excess as a lump sum. A further 1,100 savers were taxed at 25% for withdrawing the savings above the allowance limit as income.
The Punter Southall Aspire research also revealed 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 annual allowance limit is not breached, this blunt approach might not be best option for all employees.
“Capping contributions at £10,000 won’t benefit everyone. 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 they may have unused pension tax relief from previous years which could be carried forward too. “
More inconsistencies were evident in the way employers treated National Insurance Contributions when a cash allowance is paid. Whilst pension contributions don’t carry any National Insurance liability for the employer or employee, a cash allowance is subject to National Insurance, which is 13.8% for employers. Whilst over half of companies (52 per cent) said they deduct this cost from the cash allowance, 48 per cent said they don’t – so some employers are shouldering the cost and in other cases, employees are picking up the bill.
Employers were also asked if they had reviewed their life assurance arrangements as a result of the reduced lifetime allowance, because ‘death in service’ benefit can count towards the total allowance.
Whilst some companies are setting up excepted schemes to avoid people breaching the allowance, two thirds of companies (68 per cent) admitted they have not reviewed their life assurance. With many group life schemes offering four times salary as a death benefit it would be very easy for high earners to breach this allowance on death – leaving their heirs with a large tax bill.
“Our survey shows significant differences in the way in which financial services companies are supporting their high earners to handle these tax changes. Whilst some are providing good levels of support, others have their heads firmly in the sand. Unfortunately, it is clear that many employees are still exposed to potential tax bills and if this situation doesn’t change, we expect HMRC to be reporting a significant rise in the amount of tax collected in a year’s time. We hope that these findings encourage more high earners to seek advice about their options and avoid sleepwalking towards a tax liability when they complete their 2016-17 tax returns.”