The period from Christmas to the beginning of April and tax year end is always busy, but this year has been even busier due to the changes to pensions announced in the October 2024 Budget. So, I thought it might be useful to outline the main things advisers have been getting in touch to ask about with regards to pensions recently.
What is the change in employer National Insurance contributions?
From 6 April 2025 the rate at which employers pay National Insurance (NI) contributions will increase from 13.8% to 15% and in addition to this, the threshold from which they become payable reduces from £9,100 to £5,000. Perhaps providing some relief against this are the changes to the Employment Allowance, which is the portion of employer NI contributions that the employer doesn’t have to pay. Until 6th April 2025, this is only available to employers that have a total NI bill below £100,000, and if this is the case, they don’t have to pay the first £5,000 of employer NI they would otherwise have been liable for.
From 6 April 2025, as well as the £100,000 cap being removed, meaning this is available to all eligible employers, the allowance has increased. From that date, eligible employers won’t have to pay the first £10,500 of the NI bill they would otherwise have been liable for. The upshot of this is that some employers will see their NI bill reduce, some will see no change, and others will see their NI bill increase.
Is there anything employers can do to mitigate the impact of the NI changes?
For some employers, these changes will have a significant impact, and research carried out by Royal London in early November 2024 suggests employers are considering a range of measures including recruitment freezes, limits on salary increases and increase in prices of the goods and services they produce. One way to mitigate the impact of the increase in employer NI is to introduce salary exchange for workplace pension contributions. When using salary exchange, employees see their gross salary reduced in return for a non-cash benefit, such as an employer pension contribution. As less gross salary is being paid, the employer makes a NI saving which can either be redirected into the employee’s pension or retained in the business to help offset some of the NI increase on the non-exchanged salary.
What are the rules around carry forward?
Carry forward enables a pension scheme member to carry forward the unused annual allowance from the three tax years preceding the current one and apply them to this year’s annual allowance. It’s important to remember that the current year’s annual allowance needs to be used in full first, before going back to the earliest of the three preceding years and carrying forward the unused allowance. The individual needs to have been a pension scheme member in the year they’re looking to carry forward from, but that could be an active member, deferred member, pensioner member or pension credit member, so really it’s only those who have never saved into a pension before who are ineligible to use carry forward. For this reason, it’s often beneficial for business owners who may not benefit from automatic enrolment to make a contribution to a pension plan, even if it’s just a small contribution, to ensure carry forward is an option at a later date when perhaps they are in a position to make a more significant contribution.
So, does that mean I can pay in my total unused allowances from this year and the previous three?
Not necessarily. The important thing to remember here is that what’s being carried forward is unused annual allowance, not unused tax relief. If it is an individual making this contribution, as most providers will only accept individual pension contribution that are eligible for tax relief, an individual can only contribute up to their pensionable earnings for the tax year in question, regardless of how much carry forward they have available.
For example, suppose an individual has available carry forward of £20,000 to be added to this year’s £60,000 standard annual allowance, so total annual allowance available of £80,000 in this tax year. However, if they only have £65,000 of pensionable earning in this tax year, they maximum they could make as an individual pension contribution and receive tax relief on, is £65,000.
Employer pension contributions don’t require the recipient to have pensionable earnings to support the contribution. Instead, employer pension contributions need to meet the wholly and exclusively for business purposes rule.
Can I use carry forward if I’ve triggered the Money Purchase Annual Allowance (MPAA)?
You can’t use carry forward to increase contributions to money purchase schemes above the £10,000 limit, if you’ve triggered the MPAA. You do though still have up to the remainder of the standard AA of £60,000 available to use for your defined benefit schemes.
Towards the tax year end then, it’s important to make sure your clients use the MPAA, as any unused MPAA can’t be used in a future year.
What should I be doing now regarding Inheritance Tax (IHT) being applied to pensions in the future?
The October 2024 Budget announced the proposal for IHT to apply to unused pension funds from April 2027. The consultation on this closed on 22 January 2025, but as yet no response has been issued. So, for most people, it’s probably too early to offer definitive answers, as we don’t yet know the questions.
However, for some clients, particularly those who are unlikely to ever exhaust their pension fund and have been using it largely as a vehicle cascade wealth through the generations without it being subject to IHT, there may be some argument for action now. Tax year end is often a point that withdrawals to be taken from Income drawdown plans are re-assessed for the coming year. A discussion point that might be more common leading up to April 2025 concerns increasing drawings from drawdown plans in order to make use of the “gifting out of normal expenditure” exemption. This exemption has possibly been underused in the past, but it is quite relevant if unused pensions are going to be subject to IHT in the future.
These are a few of the questions we’ve been asked recently about tax year end and how the October 2024 Budget changes affect tax year end planning for 2024/25. For more help, please have a look at our tax year end hub.
Justin Corliss, Technical Team Manager, Royal London
