The 2018/2019 tax year is here. What impact does this have on your pension contributions?
In the second of three articles, we pay attention to the impact tax year changes can have on the tax relief of pension contributions. Have you made the necessary changes to payroll, procedure and communications that the new tax year has prompted? It is important to incorporate the new tax and auto enrolment thresholds, and the increase in minimum contributions for auto enrolment into your current processes.
Considering how any potential issues or problems arising from these changes, and what action, if any, should be taken by you or your employees is an important part of any tax year changes.
Annual Allowance for pension contributions
The Annual Allowance (AA) is a limit on the total amount of contributions that can be paid into a Defined Contribution (DC) scheme from any source (employee, employer and third party), and a limit on the amount of benefits which can build up within a Defined Benefit (DB) scheme each tax year, for tax relief purposes. The standard AA for 2018/19 will remain unchanged at £40,000.
Tapering of the Annual Allowance
The earnings thresholds for the tapering of the AA also remain unchanged for 2018/19. Individuals with a threshold income of more than £110,000, and an adjusted income of more than £150,000, will continue to have their AA reduced by £1 for every £2 earned over £150,000. The maximum reduction applied (applicable to those earning £210,000 or more) is £30,000, leaving an AA of £10,000.
It remains important that those employees with earnings at this level are aware of how tapering will affect them, particularly if they are considering making a substantial contribution to their pension this tax year. Of particular relevance this tax year is that, being the third year of application of the taper, affected employees may find that any attempts to mitigate its affect by carrying forward unused allowances from previous years, is now very limited if their AA was also reduced in the previous 2 years.
Discuss any tapering issues you may have with your Jelf consultant and tackle any potential problems for employees.
Money Purchase Annual Allowance
Anyone accessing their pension income using the pension freedom options may trigger the Money Purchase Annual Allowance (MPAA). This is a specific allowance in respect of money purchase (DC) pension savings.
The MPAA was reduced to £4,000 from £10,000 with effect from 6 April 2017, and remains at £4,000 for the 2018/19 tax year. It is anticipated that this reduced allowance will now affect many more people, particularly where the employer pension scheme offers more generous terms than the auto enrolment requirements. For example, a combined employer and employee contribution of 10% on a pensionable salary in excess of £40,000 would result in a contribution in excess of the reduced MPAA limit, as would a combined 12% contribution on a salary in excess of £33,335.
Care will need to be taken to ensure that the MPAA is not exceeded by accident, and that informed planning is done by those seeking to make use of the flexibility offered by pension freedoms whilst still in your employment. You may wish to educate employees of the risks involved.
Lifetime Allowance increase
The Lifetime Allowance (LTA) is a limit on the amount of tax-relieved pension benefits an individual can accumulate in their lifetime, without incurring a tax charge. With effect from 6 April 2018 it has increased in line with the Consumer Prices Index from £1 million to £1.03 million.
This small increase may offer some relief to those with accumulated pension savings at this level. Individuals with significant pension benefits need to check carefully whether they are affected by this limit, or could be in the future, and plan accordingly. As part of this process it is important to note that the limit could include death in service benefits when they are paid from a HMRC registered scheme.
Engage with your employees potentially affected by this limit, with a view to flagging the risks and developing strategies to avoid being impacted. This could include a communication exercise, access to individual financial advice or the provision of more generic education and information. Alternative reward strategies could also be considered.
You can read our other articles about the 2018 / 2019 tax year and the impact on pensions here: