Budget – Employer contributions also hit by high-earner relief cap

The restriction on tax relief announced in the Budget will apply to contributions made on employees’ behalf by their employer as well as the employee’s own contributions says HamishWilson.

The firm says employer contributions paid in respect of high earners will no longer be tax-exempt as far as the employee is concerned. It points out that it will be easy to quantify contributions made to defined contribution pension arrangements, but not so easy in defined benefit schemes.
The Government will consult on the implementation of the restriction of tax relief and how employer contributions to DB schemes should be valued.
Employers will continue to receive full relief from corporation tax on their pension contributions.
Gary Tansley, senior actuary at HamishWilson says: “It had been rumoured for the last few days that tax relief was going to be restricted, possibly by abolishing higher rate tax relief. The restrictions do not go that far and so apply to fewer people, but have surprised many by applying to employer contributions as well as personal contributions. This raises serious questions for anyone earning over £150,000 pa.
“It had been suggested that the restriction on tax relief could be mitigated by making schemes non-contributory or by introducing “salary sacrifice” arrangements, but such steps would not work given high earners will now be taxed on their employer’s contributions.
“We keenly await the detail as to how employer contributions to DB schemes are to be quantified. Presumably these will only relate to ongoing benefit accrual as it would be unfair for deficit-reduction contributions to be included, particularly to the extent these relate to liabilities in respect of pensioners and deferred pensioners. There again, high earners who are self-employed and feel the need to plug the hole in their DC pension savings caused by the recent stock market falls may disagree because their “deficit reduction” contributions will not attract tax relief.
“We would imagine the restriction on tax relief will be effected via high earners’ self-assessment tax returns. If so, there ought not to be any additional administrative burdens for employers, which would be one small crumb of comfort.”