Follow up

Information on LA protection

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New year, new tax issues for pensions

Tax relief on contributions

One of the unfortunate consequences of increasing the personal allowance so significantly in recent years is that low earners can end up in pension schemes but not be taxpayers. Does that matter? Well the answer is a definite “maybe”.

If you have chosen a relief at source (RAS) pension scheme for your employees, such as NEST, where pension contributions are taken from net pay after tax and NI, then HMRC allows the pension provider to request 20% tax relief and add it to the pension fund.

Extra relief

If the employee pays more than 20% tax, they will ask for the additional relief via their personal tax account or self-assessment return. However, if you’ve chosen a scheme where contributions come off gross pay, such as Smart or NOW, then anyone who isn’t paying tax isn’t allowed any tax relief.

This affects most low paid employees in the public sector as all the public sector pensions schemes work on the net pay arrangement (NPA) - it’s called net pay when it comes off gross pay!

Pro advice. The lack of tax relief also means that if you have an RAS scheme but then offer it via salary sacrifice it won’t necessarily be a good idea for your low paid staff. They won’t save any tax (and maybe no NI either depending upon their level of pay) on the sacrifice, and as the sacrifice is treated as an employer contribution there is no tax relief added to the fund either.

Devolution differences

In Scotland there are five tax bands and rates, the lowest being 19%, but all taxpayers in RAS schemes are given 20% tax relief as a default with 19% taxpayers not required to repay the additional relief - in NPA schemes they only get 19% relief.

In Wales income tax is being introduced from April 2019, so 10% of each tax rate goes to the Welsh Assembly. As the basic rate is still 20% but is simply split between Wales and England, HMRC will still provide 20% tax relief to those in RAS schemes.

Lifetime allowance

The lifetime allowance (LA) is the maximum amount of pension saving that can be accrued without incurring a punitive tax charge. If you take the pension fund monies above the LA as a lump sum you pay (just) a 55% tax charge. If you take it as income, you pay a 25% tax in addition to your usual rate of income tax. The LA rose to £1,054m for 2019/20.

To avoid the LA tax charge an employee who has total pensions savings that are going to exceed the LA can take LA protection (see Follow up). It is not difficult for anyone with a final salary pension to breach the LA as the annual pension due is multiplied by 20. A pension of £52,700 breaches the limit and wouldn’t be unusual for senior staff in the public sector, for example.

Pro advice. It makes sense to ask all new starters if they have LA protection, so you can exclude them from auto-enrolment. You lose your protection if you ever become a member of a pension scheme again, i.e. have new employer or employee contributions paid into it.

Information on LA protection