The introduction of the tapered annual allowance means that some individuals will see their allowable pension contributions for the 2016/17 tax year reduced to just £10,000.
The general allowance of £40,000 is reduced by £1 for every £2 that adjusted income, which includes employer pension contributions, exceeds £150,000. The minimum allowance is £10,000 when adjusted earnings are more than £210,000.
If the allowance is exceed then taxpayers will face a tax liability on the excess contribution at their highest marginal rate of tax, so anyone who is unaware that they should be reducing their contributions from £40,000 to £10,000 will have a tax bill of £13,500 come January 2018 (£30,000 @ 45%).
The change has the potential to cause a number of difficulties:
- Employees may not be able to properly assess their income level, and therefore their maximum pension contribution, until the end of the tax year, particularly if their remuneration includes bonuses based on performance.
- Employers may not know that their employees have other sources of income and that continuing to make employer contributions on the same level as previous years will trigger an additional charge for them.
- Pension schemes do have an obligation to inform individuals who exceed the annual allowance, but this only applies to the £40,000 general allowance and not to any tapered allowance.
The responsibility for assessing the allowable pension contribution lies with the individual and not with their employer or the pension scheme. Despite this, employers might like to consider highlighting the possible impact for their employees, particularly those on higher salaries or with larger employer contributions.
Doctors and dentists who benefit from the generous NHS pension arrangements are one group of employees who should be particularly wary of the tax charge. Their employer pension contributions particularly difficult to calculate and they should check their contributions details with the NHS before submitting their self assessment tax returns.