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Double whammy for high-earners

09 July 2009

High earners are facing a swingeing new pensions blow, it was claimed today.

Tucked away in the 2009 Budget small print was further bad news for those earning £150,000 and above, according to Andrew Shaw, national tax managing partner at BTG Tax, part of the Begbies Traynor Group.
Already hit with a 50 per cent tax charge and the reduction in tax relief for pension contributions to 20 per cent, HM Revenue & Customs wants to treat their employer pension contributions as benefits in kind chargeable at 20 per cent on the individuals concerned, effectively a "double whammy".
The change is scheduled for 2011 but would not affect standard rate taxpayers. The proposals are currently up for consultation.

“However, the Treasury has already indicated that it now takes the view that employer contributions are ‘deferred salary’ and therefore should be legitimately taxed as a benefit,” said Mr Shaw.
“This means a top rate taxpayer would have to pay £2,000 in tax on a £10,000 contribution to a money purchase scheme. But the situation is even more complicated and expensive for final salary scheme contributions, where benefits are added on in the form of years. The tax bill could be much higher.”

Mr Shaw said the proposals would also hit high earning employees whose bonuses are paid as tax efficient pension contributions, also where these are part of a termination package. If enacted, the rules would also include so called "forestalling" measures designed to operate from April 22 2009 and prevent high earning employees from accelerating salary or bonus waivers in exchange for additional employer contributions in the tax years 2009/10 and 2010/11.

Mr Shaw said: “It is therefore recommended that any employer considering a salary waiver pension scheme should be wary of including employees or directors who will fall into the high earner category, and therefore may be caught by the forestalling provisions, as they could potentially be in a worse position.

“The good news is that basic rate and 40 per cent taxpayers will still receive full tax relief on their pension contributions and salary sacrifice schemes for these employees will continue to be tax and NIC effective, even more so when NIC contributions are increased.

“The number of salary waiver schemes is now expected to increase as employers seek ways to reduce their salary costs.”

Mr Shaw said pension firms situated offshore had also reported a jump in enquiries about so-called qualifying recognised overseas pension schemes (Qrops). These do not require the purchase of an annuity at 75 and the individual can pass pension assets on to the next generation without punitive UK tax charges.

“Offshore bonds, with similar perks, are also expected to flourish. However, it may only be a matter of time before these schemed are targeted.”

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