Over 240,000 higher earners could risk unplanned tax charges due to confusion over the reduced annual allowance on pension contributions coming into effect in April, according to warnings from employee benefits consultancy Portus Consulting.
The summer Budget confirmed a cut in the £40,000 annual allowance for high earners by £1 for every £2 earned above £150,000 to a minimum of £10,000 taking effect from April 2016.
But Portus Consulting is warning that confusion over how individual allowances are calculated could expose people earning between £150,000 and £210,000 to unexpected tax bills.
Steve Watson, Portus Consulting’s commercial director, said the allowance for higher earners is effectively a moving figure with the risk that employees may only be aware they have broken the limit when they face a tax charge.
He said: “The confusion now will be that the annual allowance for high-earners will be a calculated figure and not a set figure and employees may not know whether they have exceeded the allowance until it is too late.
“Anyone with variable annual earnings could potentially be at risk and employers and employees need to think carefully about the implications.
“The big concern would be that higher earners decide that the best thing to do would be to just cap pension contributions at £10,000 per annum or, worse still, decide that saving into a pension is just not worth it.”
Employer contributions are included in earnings which can also make a difference while salary sacrifice does not help – employer contributions are added into earnings to calculate the annual allowance.
Employees earning between £150,000 and £210,000 are most at risk – those earning above £210,000 will see their allowance reduced to £10,000.
An example of someone who could be affected would be an employee on £170,000 matching their employer’s contribution of 5%. They will have £17,000 paid into their pension scheme in a year and be well within their allowance of £25,750. However if they received a bonus of £30,000 at some point in the year, total earnings would increase to £200,000 which would reduce their allowance to £10,750 creating a potential tax charge.