Employees who are taking benefits from a pension but still contributing to your scheme – beware of HMRC!

Employees who are taking benefits from a pension but still contributing to your scheme – beware of HMRC!

The beginning of a new tax year always brings changes to the financial world. In April 2015, the new Pension Freedoms opened the door to everyone to be able to take their pension flexibly. The evidence has been clear – most people are now choosing not to purchase an annuity, and instead are accessing their pension via flex-access drawdown or simply taking cash.

These options are especially popular for people who wish to reduce their hours, thereby taking a lower salary, but topping up their earnings from drawing down income from their pension. However, a change being introduced from this tax year could catch quite a few of these people unawares.

The government, in a bid to stop people taking advantage of the tax relief and tax-free cash elements of pensions, closed the loophole whereby people could make a tax gain from flexibly accessing their pension. This was done through something called the Money Purchase Annual Allowance (MPAA). The MPAA rules are in place to stop people “recycling” pension savings, whereby an individual pays a pension contribution, gets tax relief on it, then immediate draws it from the pension and gets 25% of the amount back tax free.

Until April 2017, the MPAA was £10,000. This meant that an individual who had flexibly accessed their pension could still make a pension contribution of up to £10,000 per annum, although this was inclusive of any employer contribution.

From 6th April 2017, the MPAA has been reduced to just £4,000 (gross). For many employees, this could leave them in a position where their contribution, plus that of their employer, may take them over the £4,000 limit.

Once the MPAA has been triggered, it can’t be turned off. So, an individual who has previously accessed their pension, and who is paying in more than £4,000 per annum into their pension, will still be caught out – even if they haven’t accessed any cash from their pension this year. There’s no ability to “carry forward” any unused allowance from a previous tax year.

This is a complex area, and there are certain circumstances where the MPAA does not apply. The problem for employers is to help employees understand what the MPAA and in what circumstances it could apply to them. Obviously, employers may not know if an employee is flexibly accessing one their pensions, but there are some actions you could consider taking:

  • As people can only access their pension from 55, consider a targeted communication to these individuals in your workforce
  • The MPAA only affects people paying over £4,000 in total to their pension, so cross reference your over 55s with anyone who has a pension contribution close to or over this amount (including their employer contribution).

Ink can support you in the communication to your employees, via our Employee Engagement emails, or in a presentation/workshop, where we can speak to your employees face-to-face.

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