The money purchase annual allowance (MPAA) places a restriction on the amount of tax efficient pension contributions that can be made by employees who have already accessed their pension flexibly. The standard annual allowance is £40,000; whilst the MPAA was initially set at £10,000, it was announced in March 2017 that this was to be reduced to £4,000 from the start of the 2017/2018 tax year.
Whilst changes to the MPAA were put on hold after the snap general election was called in June, the legislation shifts are now being implemented with changes backdated to April 2017. Those who’ve accessed their pension through the pension freedoms will be informed by their pension provider if the MPAA affects them. In the majority of cases, this will only be people aged 55 and over.
Anyone who makes more than £4,000 worth of contributions during the 2017/2018 tax year will be subject to a tax charge. It’s important to remember that this includes both contributions made by the employee and those made by their employer. The charge is calculated based on your income tax rate. As such, basic rate taxpayers will be charged at 20% of the amount they are over the limit, higher rate taxpayers at 40% and additional rate taxpayers at 45% – essentially removing the tax relief benefit of member contributions and income tax exemption for contributions made by their employer.
So what can employees do to avoid being caught out by the new, lower allowance? One choice is to opt out of a workplace pension, but this would mean the benefits of employer contributions would be lost. Another option for some will be to reduce their total contributions, although this will depend on the rules of a particular scheme. Again, reducing your own contributions will usually mean your employer’s contributions go down too, although some employers may agree to upping their employee’s salary to balance this out.
Whilst the MPAA doesn’t directly affect employers, they need to be aware of how their employees might take action to limit its impact. Any employee opting out of a workplace pension or reducing their contributions will go into the three year automatic re-enrolment pool. However, this can be avoided if the employer uses an entitlement check, which is passed if the pension contributions from the employee and the employer are at least as good as those required based on qualifying earnings.
The entitlement check up to the end of the 2017/2018 tax year is against 2% of qualifying earnings, with at least 1% of this coming from employer contributions. As the qualifying earnings band for this tax year is £5,876 to £45,000, the entitlement check is against a maximum of £782.48. Even if the 8% contribution rate is used by an employer, this would still come in at £3,129.92, which is well under the £4,000 allowance.