Those who thought they had seen a way round Mr Darling’s pension tax relief cuts must think again.
Salary sacrifice around pension contributions may not be such a good bet as was first thought after last month’s Budget, when Chancellor Alistair Darling said tax relief on pension contributions for high earners would be restricted from April 2011.
For staff earning more than £150,000 a year, tax relief will gradually be tapered from 40% down to 20% for those who earn over £180,000. This is in line with the 20% relief for basic-rate taxpayers. This cut in tax relief could see pensions become a less attractive form of remuneration for higher earners and might affect how employers reward senior staff.
Salary sacrifice contributions, whereby employees give up a portion of their pay in exchange for an employer contribution to their pension pot, are taken from employees’ gross pay and are free from tax and national insurance (NI). They had therefore seemed a promising solution for employers seeking to bypass the tax relief restrictions.
But the government has pre-empted employers seeking to circumvent the tax changes with such arrangements. The changes state that higher earners will now be taxed on their employer’s contributions as well as their own. Deborah Cooper, head of Mercer’s retirement resource group, said: “People thought there were opportunities to do salary sacrifice to get round it but the government has been quite efficient in closing off those opportunities.”
In addition, the Budget changes prevent anyone earning more than £150,000 from increasing their normal pattern of contributions between now and April 2011, or from increasing their total employer and employee annual payments beyond £20,000 a year – a sum to be known as a special annual allowance. Above this allowance, tax relief on pension savings will be at the 20% basic rate only, which may also prevent employers introducing salary sacrifice to reduce the individual’s income to below the threshold.
Firms that had intended to use a bonus or lump-sum payment via salary sacrifice to top up an employee’s pension as an employer contribution will also be affected, said Sue Bartlett, partner at Watson Wyatt. “They can still do it, but it won’t be tax-efficient,” she added.
But James Biggs, associate director of Jelf Employee Benefits, said staff earning £150,000 or more who already have a regular salary sacrifice payment should not panic. “If it is a continuation of an existing scheme, and their contributions are less than £20,000, there is no real impact,” he explained.
Some providers in the market believe employers will soon find ways to get round the measures. Pat Wynne, director at Xafinity Consulting, said: “There is no doubt the government has cottoned on and tried to restrict high earners using salary sacrifice with quite draconian measures. I believe we will come up with ways to get round it.”
Elsewhere in the Budget, the income tax rate for those who earn more than £150,000 will rise to 50% from April 2010; car taxes were altered to encourage take-up of more fuel-efficient cars in company fleets; company car tax relief was abolished on some diesel and alternative-fuel cars; and £150 million was allocated to improve accommodation for employees in the armed forces.