The 2018/2019 tax year is here. What impact does this have on your workplace pension?
The arrival of the new tax year means it is important to ensure that all the necessary changes have been made to your payroll, procedures and communications. In brief, it is necessary to incorporate the new tax and auto enrolment thresholds, and the increase in minimum contributions for auto enrolment.
Consideration should be given to any potential issues or problems arising from these changes, and what action, if any, should be taken by you or your employees. In the first of three articles, we pay particular attention to the changes affecting pensions.
Whilst a full review of all the changes to UK and Scottish taxation with effect from 6 April 2018 is beyond the scope of this article, changes which are relevant to pensions in terms of affecting income tax relief on contributions are as follows:
These changes may affect the marginal income tax rate of pension scheme members, and consequently the amount of tax relief applicable to them on pension contributions.
Deduct contributions as normal
If you operate a relief at source pension scheme, where pension contributions are deducted from earnings after income tax has been applied, you should deduct contributions on the same basis as before. Your pension scheme provider will continue to claim basic rate tax relief from HM Revenue & Customs (HMRC) at 20% for each member, regardless of their marginal tax rate, and add it to their respective funds. Under this type of arrangement (which is common for contract based workplace pension schemes), members paying no income tax are still eligible for basic rate tax relief.
Any members subject to higher or additional rate taxation must claim back any further tax relief based on their marginal tax rate in 2018/19. This is usually done through their self assessment tax return, although HMRC may also amend their tax code to give the extra relief. It is also possible to claim back any extra tax relief from 2014/15 tax year onwards, if appropriate and not already reclaimed, as there is a time limit of four years for such claims. Your Jelf consultant would be happy to provide assistance with this if you have any employees affected.
Those operating a net pay arrangement, where pension contributions are collected before income tax is applied, do not need to take any action as full tax relief at the highest rate is automatically given. This type of arrangement is sometimes used by master trusts.
Is a net pay arrangement suitable for your employees?
If you have an occupational pension scheme, including some master trusts, you may deduct member contributions using a net pay arrangement. This method of deducting contributions does not apply to contract based schemes, such as group personal pensions.
It is worth noting that under this type of arrangement, employees paying no income tax do not benefit from the basic rate tax relief payment from HMRC, unlike members of relief at source schemes. This is a recognised anomaly between the two types of arrangement, and the Government is under some pressure to address it.
Arguably, the net pay arrangement may be unsuitable for workers who earn below the personal tax threshold, as they miss out on what is effectively a 25% bonus from HMRC. With the earnings trigger for auto enrolment remaining at £10,000 for 2018/19, but the personal tax threshold increasing, more people falling within auto enrolment are going to be potentially caught.
This is one of many important considerations when deciding upon the most suitable workplace pension scheme for your employees. If you are unsure which type of arrangement you have, your Jelf consultant would be happy to look into it for you, and further investigate whether it is the most suitable arrangement for you.
It should be noted that with effect from 6 April 2018 the income tax bands, rates of taxation and resulting tax relief are different for people resident in Scotland. The situation for Scottish residents has become more complex due to now having an increased number of tax bands which apply to most, but not all, categories of income. Read more on taxation for Scottish residents here.
Caution for salary exchange schemes
Whilst salary exchange (sacrifice) schemes offer great advantages, review them regularly, especially in the light of any changes made by the Government in a new tax year. With regard to 2018/19, there are a couple issues to consider as follows:
- Pay particular attention to any employees earning less than the personal allowance after salary exchange for income tax purposes, as it may not be beneficial for them to participate within the scheme.
- The National Living Wage has been increased for those aged 25 and over, and the National Minimum Wage for those aged below 25, including apprentices. The increase in these thresholds, when combined with the increase in minimum AE contributions and consequent salary exchange, may put employees at risk of inadvertently exchanging their salary below these statutory minimums.
Your Jelf consultant can assist you with any review of your salary exchange scheme.
You can read our other articles about the 2018 / 2019 tax year and the impact on pensions here: