10 March 2017 - Post by:Angela Stafford
No matter how good your scheme administration is, slip-ups can happen for a variety of reasons – human error, member misunderstanding, general administrative delays – but with the end of the tax year looming, the consequences of a mistake, particularly relating to DC contributions, can be much more significant. The annual allowance rules are increasingly complex, including the tapered annual allowance for higher earners and the planned reduction of the existing money purchase annual allowance to £4,000 (the Government confirmed on Wednesday that it intends to go ahead with this proposal). As a result, it is now more important to ensure that contributions are made in the right tax year. Mistakes and delays around this time can mean that members can incur significant tax bills.
While HMRC takes a sympathetic stance on errors in relation to unauthorised payments, this does not extend to errors which affect whether a member can benefit from their annual allowance in a certain tax year. If a processing delay, for example, means a contribution which was intended to be made in this tax year is actually paid after 5 April, this payment will generally count towards the annual allowance for the new tax year and therefore any remaining allowance and roll-over allowance available in the previous tax year may be lost.
This isn’t such an issue for employee contributions, where the Pensions Tax Manual states that contributions are treated as paid when deducted from the employee’s pay, so it generally doesn’t matter if it lands with the pension scheme later, as long as the deduction is made in the right tax year (though contributions made through Relief at Source are slightly different). However, trickier problems arise in relation to employer contributions and sacrifice arrangements, where the guidance isn’t clear on when the contributions are treated as paid. The view is generally that this isn’t until the scheme receives the payment, and there is little flexibility for retrospectively correcting mistakes.
This wasn’t a big problem in the days of the higher annual allowance, when few people were likely to exceed it in any case. However, in today’s world of the ever-tightening annual allowance noose, helped along by the tapered annual allowance for higher earners, members are much more sensitive to squeezing every bit out of their tax-free contributions. Payments made in the wrong tax year can cause a significant loss, in particular where a member was planning carefully to fully utilise their available allowance – for example by making a large payment, perhaps through bonus sacrifice, at the end of the tax year to use up the last drop of tax relief.
While mistakes cannot always be prevented, schemes should be particularly vigilant around this time of year. Prevention is better than cure, so here are three top tips for tax deadline success:
- Member communications should be clear on when decisions need to be made and information provided in order to ensure their requests are carried out in time (it’s worth checking workload capacity with your administrators and allowing for this).
- Allow enough time to address any issues (for example, incorrect information provided by the member) before the new tax year rolls in.
- Process contributions quickly and flag/resolve issues as a matter of urgency if relevant.
Angela Stafford is an associate at Allen & Overy LLP