While companies are under no obligation to help staff navigate new tax legalities, they’ll be glad of the advice come the new tax year, says Alan Morahan
In April the government introduced a raft of tax laws that affect high earners. This includes the reduction in the lifetime allowance from £1.25m to £1m, and a taper to the annual allowance, reducing this by 50p for every £1 of income between £150,000 and £210,000, to a minimum of £10,000.
In light of this, we asked leading financial services firms if they were helping their high earners handles the changes.
One of the most striking things we found was that there were major inconsistencies from one company to the next. While some employers were providing high levels of support for employees, many were falling short – leaving some high earners exposed and potentially sleepwalking into bigger tax bills. So what can organisations, and HR in particular, do to ensure employees understand their options, and what support could they be providing?
First, HR needs to ask whether or not they have provided sufficient communication around the tax changes and the implications for staff who are likely to be affected. If they haven’t, now would be a good time to host a presentation or webinar to ensure everyone has the information they need and the opportunity to ask questions.
Giving employees access to a pension consultant to answer specific queries is another sensible option. The consultant could help with calculations and provide guidance and advice. Currently, there is an income tax and national insurance contribution (NIC) exemption on employer-arranged pension advice. The UK-wide exemption means that if the employer arranges and pays for this advice, it is not treated as a benefit in kind if the value is £150 or less (rising to £500 in April 2017).
It is likely some employees will need to make changes to their pension arrangement and there are a number of options available for employers – some more practical and affordable than others – which could reduce an employee’s tax liability, so offering professional advice is vital.
Here are some of the options:
Cap pension contributions, eg at a maximum of £10,000 per tax year
This measure could be implemented for staff whose employment income, including employer pension contributions (inclusive of salary sacrifice), exceeds £150,000, with the balance of employer pension contributions paid as cash. Capping contributions at £10,000 will ensure the tapered annual allowance is not breached, provided the employee is not making pension savings elsewhere.
Offer a cash alternative to pension contributions
Employers could consider offering cash payments in lieu of pension contributions, which many high earners are now favouring. This could be a gross amount equal to the unpaid pension contribution with no adjustment, an amount netted down to reflect the additional cost of employer NICs, or an amount grossed up to reflect the cost to the employee of the income tax and national insurance incurred on the cash amount.
Bring forward bonus payments
One of the challenges for employees is calculating their ‘adjusted income’ and tapered annual allowance. This becomes even more of a problem where substantial bonuses are paid towards the end of the tax year. We’ve seen employers propose to pay bonuses earlier in the tax year, to give employees greater clarity over their total income position at the end of the tax year and facilitate effective planning of their allowances.
Extend flexible benefits options
Another option open to employers is to include the value of employer pension contributions within an optional benefits package, which allows the employee to flex pension contributions for alternative benefits if it works out more favourably.
Review death in service arrangements
If they haven’t already done so, all employers should review their life assurance arrangements in light of the reduced lifetime allowance, because ‘death in service’ benefits can count towards the total allowance. With many group life schemes offering four times the salary as a death benefit it would be very easy for high earners to breach this allowance on death – leaving their heirs with a large tax bill.
Set up a corporate ISA
Employer contributions to a corporate ISA are taxed as income and are similar to an employee paying into an ISA of their own choosing. The key attraction for employees is the packaged facility and the ability for contributions to be deducted via the payroll. However, it is unclear how popular this facility is likely to be with employees and many employers have concluded that the time and costs of implementation have made this an untenable option.
Employers do have options for helping high earners reduce their tax liability and although companies don’t have a legal obligation to do this, most high earners will thank them come the next tax year.
Alan Morahan is managing director of DC consulting at Punter Southall Aspire