KATIE MEARNS says new pension allowances coming into effect next month will still involve tax charges
It’s more than a year since the Chancellor Jeremy Hunt announced his plans to abolish the pensions lifetime allowance (LTA), his aim being to stimulate economic growth and prevent high earners, in particular doctors, from reducing their working hours or retiring early due to tax charges.
At first glance, the statement in the Spring 2023 Budget seemed like good news as it allowed people to contribute significant amounts to their pension without worrying about a tax charge. Although the LTA level of £1,073,100 seems high, many middle earners, as well has high earners, found themselves approaching or exceeding this threshold, resulting in tax charges.
However, the removal of the LTA doesn’t mean there are no limits on the amount of pension savings clients can take without a tax charge. This is because three new allowances will come into force from 6 April: the Individual’s ‘Lump Sum Allowance’ (LSA) set at £268,275, the Individual’s ‘Lump Sum and Death Benefit Allowance’ (LSDBA) set at £1,073,100 and the Overseas Transfer Allowance (OTA) set at £1,073,100.
All the acronyms and different allowances can be quite confusing for pension scheme members. This is where business owners and pension scheme administrators can play a crucial role in ensuring that their employees understand these changes and are able to make informed decisions regarding their pensions.
Mid-level and senior employees in particular may find they are affected by the new rules and taking financial advice can help them to navigate these changes, understand their pension options, and make decisions about retirement planning.
Business owners can facilitate workshops, seminars, or one-to-one sessions with financial advisers to educate employees about the new pension allowances, tax implications, and retirement planning. Providing clear communication and resources tailored to the specific needs of employees can empower them to make sound financial decisions aligned with their long-term goals.
Pension scheme administrators can also play a proactive role by ensuring that employees have access to information about their pension options, including the new allowances and any associated benefits or tax considerations. Clear communication and support services can help employees navigate often complex decisions about their pension.
Here in Scotland, the introduction of the new ‘Advanced Rate’ income tax charge adds another layer of complexity to personal finance decisions, particularly for those in the £75k-£125k earnings bracket. The 45% tax rate could make additional pension contributions even more attractive for Scottish employees, especially when the employer offers a salary exchange (sometimes referred to as salary sacrifice) agreement.
Salary exchange involves an agreement between an employer and employee where the employee agrees to reduce their salary in exchange for non-cash benefits, such as increased pension contributions. This can lead to immediate tax savings for the employee, as pension contributions made through salary exchange are not subject to income tax or National Insurance contributions up to certain limits.
For employees affected by the Advanced Rate tax charge, maximising pension contributions through salary exchange could help reduce their taxable income and potentially move them into a lower tax bracket, resulting in significant tax savings.
Again, it’s important for individuals to assess their personal financial situation and look at their long-term retirement goals before making decisions about pension contributions and salary exchange. Providing employees with access to a financial adviser is a great way to support them in making the right decision for them.
Katie Mearns, Corporate Benefits Adviser, Aberdein Considine Wealth
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