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‘Safe limits and cash in lieu’: How firms are dealing with pensions tax taper

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Employers are changing the way they pay pension benefits to higher earners in light of the tapered annual allowance introduced a year ago.

Since last year, individuals have subject to a reduced annual allowance where they earn over £150,000. For those earning over £210,000 the annual allowance will drop from £40,000 to £10,000.

The Financial Times reports employers are taking different approaches towards advising employees of the taper, with some providing bespoke solutions and some avoiding a conversation altogether.

Some firms are choosing a “safety first” approach which imposes a blanket £10,000 cap on workplace pension contributions.

Hymans Robertson partner Chris Noon told the newspaper: “Fearful of misunderstanding the taper, exceeding their annual limits and facing tax charges as a penalty, many simply choose to cap their pension contributions at £10,000, rather than calculating whether this is necessary.

“Evidence from our clients has shown that a third of company schemes are implementing a cap at £10,000 and many more are considering it.”

Cash in lieu of pension contributions are also becoming prevalent.

Handelsbanken Wealth Management head of advice Christine Ross says: “We have seen an employer establish a special defined contribution section for total annual employer contributions of up to £10,000, with any balance being paid to the employee as a cash allowance.

“Some employers have offered a lower percentage of salary to allow for the higher employer national insurance cost. For example, in the case of one employer, they will contribute 15 per cent [of salary] into the company defined contribution pension scheme, but 13 per cent as a cash alternative, paid through PAYE.”

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