Chris Noon, Head of Workplace Savings, commenting on the complex area of the annual allowance taper, and the approach taken by Government on this, says:

“The implementation of a sliding scale of annual allowance that tapers from £40,000 at £150,000 of earnings to £10,000 for those who earn more than £210,000 has boosted government finances this tax year*, which was the motivation behind its introduction. However, the taper is a huge disincentive for pension saving for high earners, and their employers, who are being paralysed by the complexity of the system.  Fearful of misunderstanding the taper, exceeding their annual limits and facing tax charges as a penalty, many are simply choosing to cap their pension contribution at £10k, rather than calculating whether this is necessary. Research has shown that when the annual allowance fell from £50,000 of £40,000 the numbers exceeding this limit rose by 79% and this could be even greater with the introduction of the taper.

“Evidence from our clients has shown that a third of company schemes are implementing a cap at £10k and many more are considering it.  This year people will have benefited from ‘carry forward’ to enable additional pension contribution, but as this can only be applied for three years, this will soon dry up and even greater numbers of high earners will be hit. “For DB schemes, the tapering of annual allowance for higher earners to £10,000 will lead to anyone earning a DB pension of more than £700 pa paying tax on the excess at the point it is earned and then again when it is drawn down.

“It’s clear that outside auto-enrolment, incentivising pension saving is not a priority for the Government. They are intent on clawing back a significant proportion of the c£50bn a year spent on tax and National Insurance relief. Living the current pension tax relief ‘mess’ is simply not sustainable and we’d to see a fundamental review of long-term saving incentives that genuine encourages all individuals to save for retirement and long-term care”

*Tax revenue will have increased by more than the £260m the Government had predicted. In addition to the cash tax receipts from capping contributions at £10k, there will be additional tax charges because of exceeding the TAA and in addition if some employees have reduced contributions to mitigate any tax charge, meaning that additional tax receipts would have flowed to the Government from income tax and or corporation tax. This is difficult to estimate but an additional £100m wouldn’t be unreasonable.