One year on from the Chancellor's 2009 Budget, in which the proposed changes to pensions tax relief were first announced, thousands of people on higher incomes face material reductions in their net income from this month onwards, as the initial impact of a raft of tax changes hits corporate payrolls.
The restriction of pensions tax relief for higher earners is another step that will come into force next April and will have a significant impact on net pay.
For example for someone earning £175,000 the impact from 2011/12 will be five-fold.
- Their personal allowance will be eroded completely.
- They will be paying some 50% tax.
- Their National Insurance contributions will increase.
- They will face an effective tax charge on their employers’ pension contributions.
- They will suffer reduced tax relief on their personal pension contributions.
The cumulative effect of these changes will mean that an individual who earns £175,000 and whose employer contributes 15% of salary to their pension could be around £18,000 a year worse off.
At a seminar aimed at pension scheme corporate sponsors last week, Punter Southall’s team of actuaries and consultants urged companies to identify individuals who will be affected, alert those individuals to the changes and review remuneration and benefit structures.
Speaking at the seminar, Henry Denne, Head of Private Clients at Punter Southall said:
"22nd April marked the first anniversary of the Chancellor's announcement of increased taxation for high earners which included significant restrictions on tax relief on higher earners' pension contributions. The subsequent Treasury consultation was unique not only in the unanimity of opposition from the pensions industry, but also in the strength of language it generated among respondents.
"Although the changes to pension tax relief do not hit high earners until 6th April 2011, the first part of the impact of the tax changes will be felt in the pockets of many of the very people who wield most influence on the future of corporate pensions. For example, our calculations suggest an individual earning £120,000 will be around £2,400 a year worse off as result of the erosion of their personal allowance in the current tax year. This will rise to £3,600 next tax year as the impact of the increase to national insurance takes effect.
“The financial impact is proportionately greater for higher earners who will also be subject to the restriction of pensions tax relief and I would urge individuals to review their own finances to maximise their use of tax allowances and tax efficient investment vehicles.”
To see a vidcast by Punter Southall Head of Research, Jane Beverley, on the 2010 Budget and Pensions for Higher Earners, please click here.
Ends
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