Employers exposing staff to unexpected tax charges, warns Aon

Aon’s analysis of more than 1,150 employers showed that up to 67 per cent have not considered the impact and tax implications of lump sum death-in-service benefits on the LTA.

Surprisingly, only a third of UK employers have acted to address this by using excepted death-in-service cover. This provides tax-efficient benefits and allows for lump sum benefits to be paid outside of the LTA, so beneficiaries are not exposed to a 55 per cent tax charge above the allowance.

Mark Witte, principal at Aon, explained: “The potential fallout of employer inaction, or incorrect action, could range from disgruntled employees and beneficiaries, to inadvertent loss of [HM Revenue & Customs] protection, which could cause significant financial impact at retirement.

“The concern is that if employers do not know enough about this subject and do not engage in the debate around providing lump sum death-in-service cover on an ‘excepted’ basis, then the impact could be far-reaching.”

There is a misconception that only very high earners are affected by the lifetime charge or that it only affects pension benefits. But increasing pension values, higher levels of lump sum life cover on offer, and the current level of the LTA – which at £1.055m is at one of the lowest levels since its introduction in 2006 – have led to middle-ranking employees being hit by LTA issues.

Mr Witte said: “Employers frequently ask us what everyone else is doing, but we would not advocate a single course of action. Indeed, there is not a commonly agreed unified approach, which is not helped by the lack of clarity from HMRC on the ‘acceptable’ use of excepted cover.”

Catherine Stait, principal at Aon, added: “Our concern is that many employers may not have made changes or even considered this topic since 2006, yet so much has changed since then – and that means many more people are now likely to be affected.”