More than 240,000 higher earners could risk unplanned tax charges due to confusion over the reduced annual allowance on pension contributions due next April, according to Portus Consulting.
The chancellor confirmed in his Summer Budget this week that the £40,000 annual allowance for high earners would be cut by £1 for every £2 earned above £150,000 to a minimum of £10,000.
Former pensions minister Steve Webb called the annual allowance taper “horrific” because of its effects on savers.
Portus warned that confusion over how individual allowances are calculated could expose people earning between £150,000 and £210,000 to unexpected tax bills.
The employee benefits consultancy’s commercial director Steve Watson says 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.
“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.”
He added that the biggest concern would be that higher earners decide the best thing to do is to just cap pension contributions at £10,000 a year or even just decide that saving into a pension is not worth it.
Employees earning between £150,000 and £210,000 are most at risk, according to Portus, with those earning more than £210,000 seeing their allowance reduced to £10,000.
James Warwick, tax partner at Deloitte, said that in the short term, the effect may be cushioned by the availability of unused annual allowance brought forward from earlier years.
“That aside, highly paid employees with defined benefits pensions will almost certainly feel the full effect of this change,” he commented, adding that all high-earners will find an annual allowance of £10,000 completely inadequate for their retirement saving needs and may seek alternative investments, including property.
“A concern for employees is that decreased senior executive engagement with the approved company pension could lead to a reduction in the quality of their employer’s pension offering.”
Gavin Moffatt, an associate at independent pension advisers City Noble, stated that cutting the annual allowance to £10,000 for high earners is a clear signal that the government believes tax relief is not targeted at the right recipients.
“This green paper takes us back to those first principles of retirement saving for all and is an excellent starting block to rethink the system from scratch – something we’ve advocated since the lifetime and annual allowances stopped being a limiting factor in the pension system and became a tax-raising factor of the personal taxation regime.”
peter.walker@ft.com
