Pensions  

Employers fear taper ‘nightmare’ as deadline looms

Employers fear taper ‘nightmare’ as deadline looms

Almost nine out 10 employers want the government to scrap the annual allowance taper, according to research by Hargreaves Lansdown, which has warned of an impending “nightmare”.

The annual allowance taper comes into effect on 6 April 2016, and one in three employers told the Bristol-based firm it would have either a very significant or significant effect.

The taper is a reduction to the standard £40,000 annual pension contribution allowance, based on an individual’s total income for the tax year and affects those with annual incomes of between £150,000 and £210,000.

Claire Trott, head of pensions technical at Talbot and Muir, said: “The annual allowance and lifetime allowance are added complexities that the industry understands, but the average individual struggles to see how they interact with tax relief and benefits at retirement.

“The introduction of the annual allowance taper has just made it virtually impossible for higher earners to work out, with any accuracy, what their annual allowance is before the end of the tax year in which they may want to pay contributions.”

The effect of the taper is that for every £2 of adjusted income of more than £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000. According to HMRC, there are 343,000 individuals with incomes of more than £150,000 who might therefore be caught by the taper. Of these, at least 137,000 fall into the income band where they will suffer some reduction to their annual allowance, but possibly not a complete reduction to £10,000.

The government has said the aim of the taper, announced in the summer budget, is to pay for its reforms to inheritance tax and control the cost of pensions tax relief in the short term.

David Brooks, pensions consultant at Broadstone, argued that recent negative inflation, combined with the taper, would make the annual allowance even more complicated.

Mr Brooks said: “September’s CPI [of -0.1 per cent] is significant for valuing the rate of growth of an active member’s DB pension for annual allowance purposes. There is an allowance for inflation and for the 2016/17 tax year inflation will be zero. So before the annual allowance tax charge kicks in members’ pensions will only be able to grow by £2,500.

“This is notwithstanding the complication of carry forward, application of the alternative annual allowance or the tapered annual allowance.”

Adviser view

Tom Binstead, director of employee benefits at Gloucestershire-based Bank House Corporate, said: “Pensions are complicated enough, and I can see why HMRC is doing it, but they have not made it simple. Employers have got enough on with auto-enrolment.”