CPPIB Cash in Lieu Allowance Guide

Example – Member B Impacted by the Tapered Annual Allowance

• Member B has an annual salary of £300,000. Member B also receives rental income of £15,000 per year. When variable incentive award payments are added, Member B’s income exceeds £360,000. • The employer contribution rate is 10% of pensionable earnings. Pensionable earnings are defined as an individual’s annual base salary plus their in -year incentive award up to a maximum of 50% of their basic salary. • Member B has invested heavily towards their pension over recent years and has no carry forward allowance available. • Member B’s total income means that they are fully impacted by the TAA. On this basis, the maximum annual contribution that can be efficiently paid into their pension is £10,000. With standard pension membership, they would be entitled to routine employer contributions of £30,000 (£300,000 x 10%) plus £15,000 from their in-year incentive award related employer contribution (£150,000 x 10%). If the standard 3% employee pension contribution is also included, Member B would exceed their TAA by an even greater amount. • Member B therefore applies for the TAA CIL allowance (instead of standard pension membership), to ensure that they do not face an unwanted tax charge on any excess pension contributions. This works as follows: ➢ Ongoing employer pension contributions of £10,000 per year (£833.33 per month). ➢ Zero personal pension contributions (the main objective is to optimise the employer contributions). ➢ Pre-deduction CIL allowance of £20,000 per year (£30,000 entitlement - £10,000 continuing pension contributions) ➢ Corporate National Insurance is not payable on pension. It is, however, payable on CIL allowance payments since they are considered cash payments. ➢ Consequently, this needs to be deducted from the CIL allowance as follows: ➢ (£20,000/113.8%) = £17,574.69 ➢ This CIL allowance of £17,574.69 per year (£1,464.55 per month) is added to Member B’s pay from April. This CIL allowance will be subject to income tax and personal National Insurance in exactly the same way as salary. ➢ Member B also receives a single CIL based on the in-year incentive award. Pre-deduction, this is £15,000 (£150,000 x 10%). ➢ After the deduction of the corporate National Insurance, the payroll CIL allowance becomes £13,181.02. Again, this will be subject to income tax and personal National Insurance. • CPPIB continues to provide the same level of entitlement, just in the form of CIL and employer pension contributions. • Member B is pleased. They feel much happier that they have the TAA CIL allowances now (albeit less tax and personal NI). In contrast, if Member B continued with standard pension membership, they would have to pay 45% tax on the excess contribution over the TAA in the very short term plus normal income tax on the eventual pension income when they reach their pension withdrawal age (any time from age 55 onwards, rising to 57 from 2028).

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