Higher Earners Warned Over Tax Relief

by Samuel Gooch - Date: 2010-08-29 - Word Count: 579 Share This!

Those that fall into the higher earners bracket have been warned that the government may impose further restrictions to pension savings in the emergency Budget on June 22.

Accountants and wealth advisers have reported a surge in calls from clients that earn over 100,000 per year who are concerned that changes to pension tax relief might restrict how much they can save for retirement.

The rules that set the boundaries around how much high earners can pay into a pension came into force last year. The new restrictions state that anyone earning more than 130,000 is only allowed to deposit up to 20,000 a year into a pension, with some exceptions.

The supposed "anti-forestalling measures" were put into place to prevent the highest earners from filling their pensions with large amounts of cash before the higher-rate tax relief is restricted next year. From April 2011, higher-rate relief will be cut down from 40% to 20% for those earning between 150,000 and 180,000.

But accountants have highlighted that those earning less than 150,000 could also see their tax relief restricted. Before the election, the Liberal Democrats stated that they would cut higher-rate pension tax relief all together. The accountancy firm Grant Thornton, thinks it is "likely" that the government will lower the threshold for higher-rate relief in June.

But Mike Warburton, tax partner at Grant Thornton, says this doesn't mean that higher earners should immediately pay more into their pensions.

He does not expect the anti-forestalling measures to be changed, which means that if any changes are made, those earning below 130,000 should still have until next April to top up their pension.

However, a different view has been taken by others, who say that cautious investors should not wait. Chris Noon, partner at Hymans Robertson, says that although he is not expecting the government to lower the contribution limits, anyone who deems it a risk should top up their pensions as much as possible before the Budget, as a safety measure.

Since the beginning of the current tax year those earning more than 150,000 have been advised to top up their pensions.

The highest income tax rate of 50% has already come into effect, but restrictions on tax relief will not be coming in until next year, so high earners have a one-year window in which they can pay as much as possible into their pensions while benefiting from a 50% tax relief - albeit with the annual restriction of 20,000.

However, some consultants have warned that people could be caught out by the restrictions without even realising. Ray Pygott, partner at KPMG, said that anyone earning over 100,000 should review their pension arrangements, as they might be getting other sources of income such as annual bonuses or rental income. These extras could push them over the current limits, therefore subjecting them to a different set of restrictions.

It is feared that both the new restrictions and other tax charges that are being introduced, will put high earners off pensions altogether.

"A lot of people will be disadvantaged by being in pensions - I think we'll see high earners coming out of pensions altogether and looking at alternatives," says Pygott.

Companies are also looking to put alternative schemes in place for their high earners. These schemes can include corporate individual savings accounts (Isas) - where the company pays into an Isa on behalf of its employee - share plan schemes and offshore savings schemes known as employee-funded retirement benefit schemes (Efrbs).

"We're getting the hint that this could hasten the closure of more pension plans," Pygott added.

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