50% tax rate for high earners and implications for pensions
In a surprising move, the Chancellor announced that those earning in excess of £150,000 will be taxed at a new high rate of 50%
However, the real story was the reduction in higher rate tax relief on pensions for top earners. Although the changes only affect those earning over £150,000, the news should also prompt others to look at their pension arrangements.
Here are the main points;
From 2011, those whose income is £150,000 or more will receive reduced tax relief on their personal contributions. Some employer contributions for this group of people will also attract a new tax charge.
- Higher rate relief will be tapered off for those earning in excess of £150,000, disappearing completely for those earning £180,000 or more.
- In the meantime, HMRC has introduced a new special annual allowance for the next two years on pension savings paid by people whose income is £150,000 or more. This allowance is £20,000 or their normal ongoing regular pension saving if higher.
- Those who make more irregular pension savings, including yearly contributions, may find the tax benefits on their pension savings restricted over the next two years.
- People who change job or transfer administrator may find they breach the new special annual allowance, and incur a tax charge.
- Those whose income is £150,000 or more need to consider their pension contributions over the next two years. They also need to consider whether they continue to save for their retirement in a pension.
- These changes only affect a small minority of people. However, there’s a danger it sends out a wider message that the government can alter the rules, so reducing the trust people have in pension saving in the future.
- There is scope for positive pension planning for those earning below £150,000.
Click here for more details on the proposed 60% marginal rate of tax on income between £100,000 and £113,000.
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