As many readers will be aware, the two current pensions tax allowances, the Annual Allowance and the Lifetime Allowance, are going to be subject to some significant changes from 6 April 2016.  The Annual Allowance is the amount of pension an employee can build up over the course of a tax year without incurring additional tax charges. The Lifetime Allowance is the amount of pension an employee can build up over his lifetime.  As with the Annual Allowance, tax charges may apply if it is exceeded.  In summary:

  • The current Annual Allowance of GBP40,000 will be subject to a tapered reduction for high earners from 6 April.  For the highest earners, the Annual Allowance will be reduced to a minimum of GBP10,000.   
  • The Lifetime Allowance is being reduced from GBP1.25m to GBP1m, which follows successive reductions already made in previous tax years.  Employees will be able to apply to retain the existing Lifetime Allowance at GBP1.25m, but only if they cease making contributions to their pension from 6 April 2016, amongst other conditions.

In the past, the reductions to the Lifetime Allowance have typically affected only the highest earners with large existing pension pots.  The latest changes have the potential to impact younger and / or less well-remunerated staff.  Employers may therefore find themselves facing questions from a wider group of staff than before as to how the changes will affect them and what, if any, action the employer is planning in response.  Options include substituting pension contributions for cash allowances or share-based incentives for affected staff, though care should be taken to ensure that employers do not fall foul of age discrimination laws, amongst other matters.

In the meantime, rumours abound that the impending budget due to be delivered on 16 March will contain further significant changes to pension provision in the UK.