Pension changes mean it's time to talk to your boss: Drop in the annual allowance will catch City workers out

Annabelle Williams
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TIME is running out for higher earners to re-negotiate their pension packages before planned new changes to the tax system kick in this April.

The amount people can save tax-free in a pension each year will drop, with special rules coming in for anyone earning over £150,000.

Experts are advising city workers to check their total salary package in case they fall foul of the rules.

“In thousands of cases, high earners must take action now to assess where they stand on the new rules. It may be necessary to either come out of the pension scheme or stop contributions,” says Mike Fosberry at Smith & Williamson.

“If the pension contributions are automatically paid as part of a reward package, individuals must also renegotiate their employment package to ensure they are suitably remunerated.”

The limit on tax-free pension contributions – known as the “annual allowance” - will to drop to £40,000 from 6th April. People can put more than this aside for retirement, but it will have to come out of their post-tax earnings.

There’s another complication for those earning over £150,000. They will have their annual allowance cut by £1 for every £2earned over £150,000.

Crucially, the government is changing the definition of earnings, so these rules don’t just apply to people on salaries of £150,000.

It now also includes property rents, interest from savings dividends and employer contributions to pensions, explains Martin Tilley of Dentons. It means the pensions tax changes that come in this April will catch a lot more people out.

As an example, someone whose total income is £180,000 would exceed the high earnings threshold by £30,000, and thus suffer a £15,000 reduction to their personal allowance. So they would only be allowed to save £25,000 tax-free, explains Tilley. The annual allowance will be tapered down to just £10,000 a year for people earning over £210,000.

Going over the £40,000 limit will have to be reported to HMRC, and there will be tax to pay. “We are advising clients to escalate this with their HR and reward teams to sort this out as soon as possible,” Fosberry says.

It’s even more complicated for workers with defined benefit pensions, and experts say awareness of the rule changes is low. “A lot of employers have been accommodating, but others have not. A lot of employers are not fully aware of the implications,” he adds.