New rules for pensions tax relief
As from April 2011 there will be a new annual limit of £50,000 on the value of pension contributions which will attract tax relief. This new rule will be relatively easy to apply in defined contribution schemes. But it may cause problems in defined benefit schemes because the limit will be based on the deemed capital value of the accrual into the scheme for a given year. So for example if employees receive a significant promotion, increasing the value of their pension entitlement on retirement, they may face an unexpected tax charge. The deemed capital value is calculated by multiplying the increase in the expected annual pension entitlement on retirement by 16, so any increase over £3,125 per annum will incur a tax liability.
The new rules may also effect the way termination payments for higher paid employees are negotiated. The new lower limit may make it less attractive to make a lump sum payment into the employee’s pension scheme as part of an exit package, though it may be possible to carry forward unused relief from previous years.
New PAYE rules for termination payments
April will also see a change in the PAYE regime for termination payments. If the termination payment is taxable but is made after the P45 has been issued, employers are currently required to deduct only basic rate tax (with any excess tax collected from the exemployee through self-assessment). As from the tax year 2011/12 the employer will be required to make deductions at the basic, higher or additional rate as appropriate to that ex-employee.
Auto-enrolment gets nearer
Over the last decade, the Government has conducted a major review of the UK pensions system, due to growing concern about the inadequacy of pensions savings and an ageing population. This has culminated in plans to require employees automatically to enroll their staff either into their own pension or, in the absence of one, into a national pension saving scheme (NEST). Employers will be required for the first time to make pension contributions in respect of their staff. Auto-enrollment will be phased in from October 2012, with the largest employers being covered first. Unlike the stakeholder scheme, there will not be an exemption for micro-employers. The Pensions Bill 2011, introduced in the House of Commons in January, includes some further changes to simplify the administration of the new regime. Among other things, it provides that only jobholders earning over £7,475 a year will be eligible for auto-enrolment.
Other pensions measures
The Pension Bill includes other measures of interest to employers, such as bringing forward the planned increase in the state retirement age so that it starts to rise in 2018. The rate at which women’s retirement age is equalised will also change, so that it will reach 65 by 2018.
The Bill is the vehicle for implementing the switch from using the RPI as the base for calculating pensions indexation. If the Bill becomes law, the CPI will be used instead, which is likely to result in a significant reduction in the value of many employees’ pension benefits, particularly in the public sector.