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Closing time?

21 January 2016

Cuts to pension tax allowances are forcing employers to rethink benefit packages.

A third of companies are overhauling how they reward higher earners, due to new restrictions on the amount people can pay into their pension tax-free each year.1 Furthermore, three in ten companies that still offer final salary schemes are considering closing future accrual for scheme members.

From April 2016, the government will restrict the annual tax-free amount that higher earners can pay into their pension. The current £40,000 annual contributions limit will be reduced by £1 for every £2 of ‘adjusted income’ over £150,000. For those earning over £210,000, the annual contributions limit will not fall below £10,000.

Adjusted income includes an employee’s salary, the value of their employer’s pension contributions, and other non-employer-related income. It is certain, therefore, that the changes will affect some individuals on lower salaries. Calculations by PwC suggest that anyone earning over £90,000 a year could potentially be affected.

Pension savings are also subject to a lifetime allowance, which places an overall limit on pension wealth. This will be cut from £1.25 million to £1 million in April.

PwC’s survey of 130 companies shows that the changes are proving so problematic that over a quarter of those the firms surveyed are reviewing the role of pensions for all their employees.

Just rewards

Many companies that offer defined contribution pension schemes are currently considering their options, while the changes are acting as a further catalyst for the closure of final salary schemes.

“The reduced annual allowance means companies are going back to the drawing board and looking at how they reward higher earners,” says Steve Moy, wealth management consultant at St. James’s Place.

“We are already starting to see employers offering to remunerate staff in a different way by providing cash allowances in lieu of employer contributions,” he says.

Half of companies are in discussions to offer cash as an alternative to their affected employees, while 42% are considering restricting contributions to prevent their employees breaching the annual allowance threshold.1

Some companies are also considering introducing alternative saving vehicles, such as corporate ISAs or flexible accrual, in order to prevent employees breaching the lower annual allowance.

Heavy duty

The changes to the pension allowances come at the same time as auto-enrolment places extra duties on business owners to enrol their eligible staff into a suitable workplace pension.

“In many cases, company directors are having to advocate pension saving through auto-enrolment, while at the same time change how they and their high earning staff save for retirement,” says Steve.

“If you’re not sure about your own situation, or how to protect senior employees from paying unnecessary high tax, then get advice.”

1, 23 December 2015


The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.


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