Higher rate taxpayers could lose out under Government pensions proposals

The Chancellor is widely predicted to introduce a flat rate of pensions tax relief for individuals in his Budget on 16th March with higher rate taxpayers looking like the biggest losers.

Currently, individuals making contributions into their pensions receive tax relief at their marginal rate, with top rate taxpayers on at least £150,000 p.a. receiving pensions tax relief of 45%.

The proposed single rate of pensions tax relief is not known, although many are predicting it will be set at around 25% – 30%.

For basic rate taxpayers, this will be good news as they will receive tax relief at a higher rate than their earnings are taxed.

Conversely, higher and top rate taxpayers will pay tax on their earnings at a higher rate than the expected single rate.

One way around this could be through the use of salary sacrifice schemes, asking the employer to pay a lower salary but more in employer pension contributions. To prevent higher earners using the salary sacrifice scheme in this way, a charge could potentially be levied on employers’ contributions for higher rate and additional rate earners.

Comments Helen Sewell, private clients tax specialist at Curo “Salary sacrifice schemes are popular because they save National Insurance for both employer and employee. Employers can also pass on the NI savings which further boosts the employee’s overall benefits package”.

Whether the Chancellor decides to tax the contributions made by the company as part of salary sacrifice remains to be seen although this would be viewed by the ‘squeezed middle’ as a hugely unpopular move and a further attack on their dwindling pension pots.

To discuss how this might affect your pension plans, please contact [email protected] or call Helen on 01527 558539..