Wealthy retirement savers could be missing out on maximising tax relief on pension contributions because the rules for claims are too complicated.
Around of third of employers paying into staff pensions have capped annual contributions at £10,000.
That’s the government cap on contributions for anyone earning between £150,000 and £210,000 or more a year after applying taper relief.
Workers at the lower end of the scale have an annual pension contribution allowance of £40,000, which they lose at a rate of £1 for every £2 earned until the lower limit of £10,000 is reached.
Employers say keeping track of earnings is too difficult and set a pensions cap of £10,000 for every employee, says consultancy firm Hymans Robertson.
Income calculations
The firm claims not correctly applying the pension cap could result in businesses and workers paying too much tax or inadvertently triggering penalties for breaching the limits.
Wealthy employees can set up their own pension to run alongside their workplace scheme to soak up unused contributions, but will still have to calculate their annual allowances and split the amount between both schemes.
Other factors can also complicate the computation, such as carrying forward unused contribution allowances from previous years.
The relief also depends on two separate income calculations – one to assess the ‘threshold’ and the other to highlight ‘adjusted’ income.
Too hard to track taper relief
As providers only automatically add 20% tax relief to pension contributions, retirement savers paying 40% or 45% tax must claim the extra relief through filing an annual self-assessment return.
Hymans Robertson say monitoring earnings is a problem for employers as the amount may include income from sources outside of their control, such as investments and buy to let rental profits.
Salary sacrifice arrangements are also credited against earnings, making the formula confusing and reliant on timely and accurate payment information coming from several sources.
Basic and higher rate taxpayers have an annual pension contribution allowance of £40,000. Only additional rate (45%) taxpayers have their relief tapered.
“Employers told us the process is just too complicated and it’s easier to stick to the £10,000 limit than try and calculate a figure for separate employees,” said a spokesman for Hymans Robertson.