Final salary high earners could be hit by another Budget tax bombshell
High earners with a final-salary pension could be hit by a further tax bombshell hidden in the Budget, which would land them with substantial bills for every pay rise.
By Harry Wallop and Ian Cowie
Last Updated: 1:18PM BST 28 Apr 2009
Already subjected to the new 50p tax rate announced by Alistair Darling last week, many could now face six-figure tax bills on relatively small increases in salary because of the way final salary schemes are valued.
This would be the third blow to the pensions of high earners from the Budget, and one that could prove another nail in the coffin for final salary schemes.
High earners, with salaries above £150,000 a year, will not only lose the generous 40 per cent tax relief on their own pension contributions, announced by the Chancellor last week, they will also have to pay tax on their company's contributions, the small print of the Budget revealed.
In a further development, tax experts say this tax bill could prove highly costly for those workers lucky enough be a member of a final salary pension scheme.
That is because these pensions are a guaranteed annual income for their rest of their life, based on their salary – not on how much they or their company contribute.
As a result, every time they enjoy a pay rise, their pension increases. As an employee, they will have to pay tax on this "contribution" from their company, the Treasury has confirmed.
However, the Revenue values the contribution as if it were a lump sum large enough to generate the pension for the rest of their life – the "actuarial valuation" as experts call it.
Mike Warburton, leading tax expert at accountants Grant Thornton, said: "This will come as a really nasty surprise to high earners. The implication is that they could be landed with a series of enormous tax bills in the final years before they retire."
For instance, someone earning £200,000 a year, who received a £6,000 pay rise, could be handed a tax bill of £24,000 – or four times the value of the pay rise.
Typically, a worker retires enjoying an annual pension the equivalent of two-thirds of their salary, as a result a £6,000 pay rise equates to an extra £4,000 a year in their pension.
The actuarial value of an extra £4,000 a year pension could be about £80,000, according to Mr Warburton – because you need a lump sum of at least £80,000 to generate an annual income of £4,000.
The Budget said high earners will have to pay tax of 30 per cent on company pension contributions, which would work out at a tax bill of £24,000 – just for a £6,000 pay rise.
This move – which the Treasury says is up for consultation – would hit most chief executives as well as a number of senior civil servants, the prime minister and leaders in local government.
A total of 290,000 people earn over £150,000 a year, with more than a third of them enjoying a final salary pension scheme, Mr Warburton estimates.
Nigel Waterson, the shadow work and pensions minister, said: "It seems to me that this is another disincentive to pensions savings. This isn't about targeting fat cats, this could produce a hugely inflated tax bill for those who have done the right thing and saved for retirement."
The Treasury said they had not worked out how they would calculate the tax workers would have to pay on final salary schemes. "We recognise that there are differences between the two types of pension schemes. Our aim is to be fair to both and we are consulting on how to do that," a spokesman said.
Ros Altmann, a former pensions advisor to the Government, said there would be an outcry from the senior civil servants, all of whom enjoy the security of a final salary pension scheme.
"They will be up in arms. I can't see the leader of Bedfordshire county council or the director of finance at the Environment Agency, or whoever, will let this happen."
Mr Warburton added, however, that the Government could not be seen to "go soft" on final salary pension schemes. "HM Revenue cannot let them off Scot-free or it will be accused of treating final salary pensions differently from money purchase schemes. In its haste to introduce this new tax, the Treasury has not thought through the implications."
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This Govt is truly retarded - it makes shaun-bhoy an Einstein!
High earners with a final-salary pension could be hit by a further tax bombshell hidden in the Budget, which would land them with substantial bills for every pay rise.
By Harry Wallop and Ian Cowie
Last Updated: 1:18PM BST 28 Apr 2009
Already subjected to the new 50p tax rate announced by Alistair Darling last week, many could now face six-figure tax bills on relatively small increases in salary because of the way final salary schemes are valued.
This would be the third blow to the pensions of high earners from the Budget, and one that could prove another nail in the coffin for final salary schemes.
High earners, with salaries above £150,000 a year, will not only lose the generous 40 per cent tax relief on their own pension contributions, announced by the Chancellor last week, they will also have to pay tax on their company's contributions, the small print of the Budget revealed.
In a further development, tax experts say this tax bill could prove highly costly for those workers lucky enough be a member of a final salary pension scheme.
That is because these pensions are a guaranteed annual income for their rest of their life, based on their salary – not on how much they or their company contribute.
As a result, every time they enjoy a pay rise, their pension increases. As an employee, they will have to pay tax on this "contribution" from their company, the Treasury has confirmed.
However, the Revenue values the contribution as if it were a lump sum large enough to generate the pension for the rest of their life – the "actuarial valuation" as experts call it.
Mike Warburton, leading tax expert at accountants Grant Thornton, said: "This will come as a really nasty surprise to high earners. The implication is that they could be landed with a series of enormous tax bills in the final years before they retire."
For instance, someone earning £200,000 a year, who received a £6,000 pay rise, could be handed a tax bill of £24,000 – or four times the value of the pay rise.
Typically, a worker retires enjoying an annual pension the equivalent of two-thirds of their salary, as a result a £6,000 pay rise equates to an extra £4,000 a year in their pension.
The actuarial value of an extra £4,000 a year pension could be about £80,000, according to Mr Warburton – because you need a lump sum of at least £80,000 to generate an annual income of £4,000.
The Budget said high earners will have to pay tax of 30 per cent on company pension contributions, which would work out at a tax bill of £24,000 – just for a £6,000 pay rise.
This move – which the Treasury says is up for consultation – would hit most chief executives as well as a number of senior civil servants, the prime minister and leaders in local government.
A total of 290,000 people earn over £150,000 a year, with more than a third of them enjoying a final salary pension scheme, Mr Warburton estimates.
Nigel Waterson, the shadow work and pensions minister, said: "It seems to me that this is another disincentive to pensions savings. This isn't about targeting fat cats, this could produce a hugely inflated tax bill for those who have done the right thing and saved for retirement."
The Treasury said they had not worked out how they would calculate the tax workers would have to pay on final salary schemes. "We recognise that there are differences between the two types of pension schemes. Our aim is to be fair to both and we are consulting on how to do that," a spokesman said.
Ros Altmann, a former pensions advisor to the Government, said there would be an outcry from the senior civil servants, all of whom enjoy the security of a final salary pension scheme.
"They will be up in arms. I can't see the leader of Bedfordshire county council or the director of finance at the Environment Agency, or whoever, will let this happen."
Mr Warburton added, however, that the Government could not be seen to "go soft" on final salary pension schemes. "HM Revenue cannot let them off Scot-free or it will be accused of treating final salary pensions differently from money purchase schemes. In its haste to introduce this new tax, the Treasury has not thought through the implications."
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This Govt is truly retarded - it makes shaun-bhoy an Einstein!
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