DEBI O’DONOVAN
This month sees the removal of the personal tax free allowance for those earning £100k per year or more at a rate of £1 allowance for every £2 of income.
Many earning between £100k- £112,950 may have missed the point that their income tax rate will effectively reach an eye watering 61 per cent. When they receive their pay slip they will be in for an unpleasant surprise.
But it is not only those earning just over £100k who need to be aware of this change. Those earning much lower amounts but also earning commissions, bonuses, car allowances or income from other sources such as investments or property could also find themselves hit by this jump in the tax rate if such ’extras’ take their total annual earnings into the £100k-£112,950 bracket.
Employers cannot be expected to know about every employees’ income streams, so if they want to be seen to be showing a duty of care to their staff it would be worth flagging this change up to employees earning anything upwards of about £70k a year.
The consensus is that it isn’t up to employers to make up for any tax increases
The consensus is that it isn’t up to employers to make up for any tax increases (just as they wouldn’t reduce salary if tax were reduced). But there is debate about whether it is appropriate for employers to bring in tax advisers to help highly paid staff to deal with their increasingly complex reward packages.
Already we see much greater use of financial advisers in the workplace when dealing with pensions and maturing share schemes, but to date there has been relatively little activity in one-toone tax advice across the reward and benefits piece that will enable employees to decide whether sacrificing their bonus into a pension or share scheme is a good idea, or when it might be an idea to reduce their working hours (and
therefore a portion of salary) to improve both their tax position and their work-life balance.
However, corporate advisers and consultants are promoting the virtues of salary sacrifice and tax-efficient benefits to this market – especially around pensions and share schemes – often delivered through flexible benefits platforms. We are also seeing the rise of the corporate individual savings account – admittedly from a very low base – as employees look for alternative workplace savings that have favourable tax treatment.
Perhaps these income tax changes for higher paid staff will provide the catalyst that the corporate wrap and flex platform markets wait for.
Debi O’Donovan is editor of Employee Benefits magazine
JOHN LAWSON
Any hopes the industry may have had that the Treasury might have been contemplating a rethink around the taxation of high earners’ pensions from 2011 were dashed in the Budget. This means that as well as the complexity that is being introduced for those earning between £100,000 and £112,900 from this month, 12 months later even more complexity will be woven into the system.
On Budget day the Treasury published a summary of responses to the pensions tax consultation. This document confirms that the Government intends to press ahead with the complex changes to pension tax relief announced at PBR by legislating for the “core aspects” in Finance Bill 2010. This has the potential to turn into one the most damaging acts against pensions in a generation. I believe we will look back on this Finance Act with a deep sense of regret because of the harm it will cause to pensions saving generally. Not only are the changes extremely complex, they are also inefficient from the point of view of savers, pension schemes and HMRC.
The changes are extremely complex and inefficient from the point of view of savers, pension schemes and HM
If the Government wants to achieve a fairer distribution of pensions tax relief, there are other ways to go about it such as reducing the value of the annual allowance. This idea, which would achieve very similar outcomes but without creating added complexity expense for all stakeholders has near unanimous support across the industry yet the Treasury has declined to give it serious consideration.
And I have little hope of the Conservative Party changing what the current government has put forward because this has been portrayed as a fatcat issue. Were the Tories to unravel what has been put in place, the opposition parties would claim they were caving in to the wealth, even though it will mean more cost to employers, schemes and even HMRC itself.
For their part, the Liberal Democrat party want to get rid of higher rate tax relief altogether, so I cannot see them supporting the changes that the industry has put forward either. What that will ultimately mean in practical terms is that both those just over £100,000 and in 12 months time those over £150,000 will look increasingly towards salary sacrifice for pensions and other things such as fuel-efficient cars, as an alternative to marginal tax rates in excess of 60 per cent.
John Lawson is head of pensions policy at Standard Life