Pre-Budget report: Employer pension contributions will count towards higher earners' taxable income

Chancellor Alistair Darling has announced in his pre-Budget report that employer pension contributions will count towards the definition of income for the higher-rate tax measure for those earning more than £150,000.

In this year’s Budget Darling announced that he would reduce pension tax relief for people with incomes over £150,000, saying that the highest earners benefit disproportionately from tax relief on pensions.

He said today: “I want do this as fairly as possible, and treat individuals the same regardless of whether they receive their pay as current salary or as a future pension benefit, and prevent avoidance.”

Darling said he would introduce a floor, so that irrespective of the size of employer pension contributions, no one with an income below £130,000 will be affected.

He said the additional money will be used to pay for extra measures like help for the young and older unemployed to get back into work.

Reflecting this change, the government announced that the anti-forestalling measures introduced in this year's Budget will be extended from 9†December 2009 so that all those with incomes of £130,000 and over will be subject to the special annual allowance.

Mark Duke, head of pensions at Towers Perrin, said: "To hit the Government's tax gathering target, it has been decided to increase the affected group by around 30%. This has been achieved by counting company pension contributions as income when testing whether someone has breached the £150,000 per annum threshold."

Marc Hommel, partner and pensions leader at PricewaterhouseCoopers, said: “The government seems to be dismissing the notion that taking higher earners out of workplace pension provision will have dire consequences for employer motivation to provide quality pensions to the rest of the workforce. †

“In the weeks following last April's Budget, over three-quarters of employers said that the government's pension tax proposal for higher earners was further reducing companies' motivation to provide wider workplace pensions, and this has been since borne out in practice by the weekly announcements of closure of existing quality pension schemes. Today's announcement that employer contributions will now also be included in higher-rate tax relief restrictions for people earning £130,000 or more, together with the associated administrative complexity, will result in further acceleration of scheme closures. "

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Readers' comments (2)

  • Many DB schemes have employer contributions that are significantly higher than the rate needed to fund current and future service - they are paying off deficits under an agreed recovery plan. Those deficits don't just relate to the individual, employer contributions are paying for all members, plus pensioner and deferred liabilities, costs built up well befoe many people joined the company.

    It looks like higher paid employees will be paying tax on contributions that bear no relationship to their own pension costs. They will drop out.

    Another administrative nightmare looms when you examine the language of recent announcements. They talk about earnings and income as though they are the same. A prudent 55 year old with investments will have income which is much higher than the reprobate serial divorcee with debt, even though they are on the same salary and in the same pension fund. One may see their employer pension contributions effectively taxed at 50%, the other may not. £150k seems like a high salary, but there are many middle managers who have taxable incomes hovering around the threshold.

    The message is: pay me in cash, I'll take the tax hit (because I can work it all out), forget the benefits, and just watch me spend spend spend. Prudent investment and pension membership is now actively discouraged by the tax system.

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  • @Richard Cowling - Whilst I agree with the general tone of the previous comment, it should be pointed out that, where relevant, what will be taxed in DB schemes is the annual increase in the capitalised value of benefits and not contributions. Unfortunately, the government is consulting on the basis of the valuation rather than simply applying that used for testing against the annual allowance and special annual allowance.

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