We have explored some of these issues in previous blog posts, but here, in no particular order, are five hot topics on which employers should currently be focussing:
1. Pensions taxation – imminent changes?
The March Budget is likely to result in changes to the current system of tax relief for pension savings. Commentators expect the Government to announce the adoption of a single rate of tax relief of anything between 20% and 33%, regardless of the rate at which an individual pays income tax.
Assuming this is implemented (taking effect from 2017 at the earliest), basic rate taxpayers would benefit, but higher rate taxpayers would be worse off. With measures also likely to be introduced with effect from 16 March to prevent high earning individuals taking unfair advantage of more favourable rates during the period before the change is implemented, high earners are being urged to maximise their pension contributions before the Budget is delivered.
Employers should review how their high earners are rewarded if the rates are changed as predicted. The changes would also have payroll implications.
2. Reduction in the lifetime allowance
From 6 April the lifetime allowance, the aggregate maximum capital value of all tax-advantaged pension savings that a person can have, will be reduced from £1.25m to £1m. As with previous reductions, HMRC has announced that there will be a protection regime for those with pensions exceeding (or which are expected to exceed) £1m in value.
HMRC will publish full details in July, though its announcements suggest the use of a similar system of Fixed Protection and Individual Protection to that used following the 2014 reduction in the lifetime allowance.
While primarily an issue for employees and their IFAs, employers should notify high earning and/or long-serving staff that this may be relevant to them.
3. Tapering tax relief for higher earners
From 6 April, the annual allowance (the annual limit on the level of tax-relieved saving, currently set at £40,000) will be reduced for many earners with annual taxable income over £150,000. For those with taxable income of over £210,000 in a year, the annual allowance could fall to £10,000.
Employers need to assess which of their staff may be affected and decide whether to limit pension contributions and/or re-shape the benefits paid to higher earners. Any changes will then need to be implemented and communicated to affected staff.
Have GMPs accrued in your defined benefit pension scheme? Trustees should have started to reconcile their GMP records with those of HMRC to avoid paying incorrect member benefits and adversely affecting members’ state pension entitlements.
Trustees have until 5 April to register for HMRC’s reconciliation service. Failure to register in time will mean HMRC’s records will be deemed to be the correct records. The opportunity to have them amended will be lost, regardless of any evidence the scheme or employer may hold to the contrary.
Employers should check that the scheme trustees have registered with HMRC. Employers should note that reconciliation exercises can be costly and may result in benefits having to be increased, which would have an impact on the scheme’s liabilities.
Employers with an open DB contracted-out scheme need to plan for 6 April, when the single-tier state pension will be introduced and the National Insurance (NI) rebates payable in return for contracting-out will cease. The loss of these rebates effectively means a 3.4% increase in employer’s NI contributions and a 1.4% increase in employee contributions.
Employers have a range of options available to manage this increased cost, including simply absorbing it, introducing salary sacrifice, closing the DB scheme to future accrual or taking a middle course, either increasing employee contributions or reducing future accrual rates by using a statutory overriding power.
Employers in this position should consider what if any steps they will take to mitigate the increased NI costs and should inform employees that their NI contributions will increase from April.