Cap on workplace pension contributions sparks concerns

Some of the UK’s biggest companies are said to be preparing to impose a £10,000 a year cap on workplace pension contributions; a sharp reduction from the current £40,000 annual allowance.

Employers that hire tens of thousands of staff are apparently looking to apply a blanket £10,000 limit on what can be paid into a company pension. The move is in response to Government restrictions to the allowance that will come into force this April and are designed to rein in tax relief for the highest earners. However, the complexity of the new annual allowance ‘taper’ is having a wider impact than originally anticipated.

From next month, the annual allowance of people with earnings of £150,000 a year or more will be gradually reduced from £40,000 to £10,000 for those earning £210,000 or more. Due to the way the taper works, those with earnings below £150,000 can be caught and are at risk of a big tax charge if they breach the annual allowance.

It is possible that employers are considering a £10,000 cap for all defined contribution pension scheme members because it is difficult to identify who would be caught by the taper. This is because all taxable income, including that from investments and buy-to-let property, not just salary, needs to be counted when calculating the taper.

Employees will still be entitled to a £40,000 annual allowance, but with many employers now looking to cap pension savings at £10,000 a year or limit pensionable salary, more workplace savers will fail to benefit from the tax perks of pensions.

Link: Workplace pensions