Employers decry pension tax rules

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Employers have raised concerns about changes to rules that will make it easier for high earners to pay tax bills on their pension contributions after new limits on annual savings are introduced in April.

The government will announce this month that people in final salary schemes who face an extra tax bill if they pay more than the new annual limit of £50,000 ($81,000) will be allowed to pay it out of their pension scheme.

However, research has indicated employers do not support the legislation, with some citing the potential administrative costs schemes may have to bear as a result.

Senior executives had feared they would have to pay the extra cash out of their earnings – with tax bills that could be as high as tens of thousands of pounds. From April, income tax will be payable on any pension contributions above the £50,000 limit. The move could affect tens of thousands of people a year.

“People who are members of final salary schemes who have been facing a nasty tax bill will be in a somewhat easier position,” said Ed Wilson of PwC.

However, nearly all companies in a survey by PwC said they were concerned about having to calculate the tax payable by members of their pension schemes, with 21 out of 34 respondents saying they did not welcome the plans at all.

Some employers have complained that the cost of calculating the tax would fall on the scheme rather than the member.

“This has huge propensity to be an administrative nightmare for schemes and employers,” warned Gordon Sharp at KPMG.

One option studied was to allow the tax to be deferred until retirement – but advisers expect the rules to state it must be paid immediately out of the pension scheme.

Employees may be responsible for paying up to £6,000 of any tax bill themselves before the scheme pays.

The legislation will be the result of a consultation by HM Revenue & Customs in November addressed at lessening the tax burden on high earners because of the changes to the annual ­pensions limit.

The government unveiled plans last year to cut the annual amount payable into a pension with tax relief from £255,000 to £50,000 a year, effective from April 6. The plans were originally aimed at curbing tax relief for the highest earners.

But warnings soon surfaced that the change could hit many people on more modest incomes, with some facing tax bills that would be higher than their annual take-home pay.

Long-serving members of final salary schemes who get a pay rise are most at risk of breaching the £50,000 limit and facing the tax bill.

The rules will add to pressure on employers struggling to maintain their final salary schemes, with most now closed to new members. “I don’t think there’s any room in this coffin for more nails,” said Tony Baily, pensions consultant at Aon Hewitt.

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