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PBR: Darling cracks down on salary sacrifice

Chancellor Alistair Darling has cracked down on the use of salary sacrifice for those earning more than £130,000 to prevent them getting around the reduction of higher rate tax relief on pensions.

During his pre-Budget report speech, Darling said: “Under existing rules the highest earners benefit disproportionately from tax relief on pensions and at the moment a quarter of all the money spent on pension tax relief goes to the top 1.5 per cent of earners.

“To make this fairer I announced in the Budget we would reduce pensions tax relief for people with incomes over £150,000.

“I want to do this as fairly as possible regardless if they recieve pay as current salary or as a future pension benefit and prevent avoidance so I have decided to include employer pension contributions in the definition of income for this tax measure.

“But to provide certainty we will introduce a floor so that irrespective of the size of the employer pension contributions no one with an income below £130,000 will be affected.”

Standard Life head of pensions policy John Lawson says: “The relevant income limit for the special annual allowance has been cut from £150,000 to £130,000 from today which will catch around another 150,000 higher earners.”

Skandia head of tax planning Colin Jelley says: “All the planning seems likely to focus around both the new £130,000 threshold as well as the previously announced £150,000. This added complexity will increase the need for those affected to get appropriate advice.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Politicians just don’t get it do they. People dislike change and constant tinkering breeds an element of distrust. How can you plan for the future when the government keep on moving the pension goalposts.
    I used to think of Gordon and Alistair as the Sooty and Sweep of politics now I think of them as sad and confused perhaps more like Nero fiddling while the city burns around them.

  2. On the face of it this makes things clearer for controlling directors with income some way below £150,000 who want to make a large employer contribution. Until this announcement the anti-forestalling regulations seemed to extend a long way down the income scales where pension contributions can be added in.

  3. Could have been worse – the industry was braced for more stringent measures after all. But this constant tinkering is not helpful. The cost of updating pensions literature AGAIN – before the ink’s properly dried on the last updates? Yet another change to Pensions SIMPLIFICATION? Bet the cost to the pensions industry and pension schemes did not feature in our Darling’s cost analysis.

    Simon Laight
    Pinsent Masons LLP

  4. What a lot of messing around. Why introduce pension simplification with potentially massive contribution levels and then start reducing tax relief this way. Just introduce contribution caps and be done with it!

  5. Dermot Brannigan 9th December 2009 at 3:30 pm

    “…the highest earners benefit disproportionately from tax relief on pensions…”!!
    Unbelievable! Tax relief on contributions is to pay back the tax you paid on the income before you paid into the pension. That way, you only pay tax once on a pension – when you receive it.
    But now this only applies to those earning under £130,000. How much do MP’s earn?

  6. Gordon and Alistair have got this one spot on.

  7. Richard Brown, Managing Director, Moneynotion Limi 9th December 2009 at 6:26 pm

    Spot on, just like they did with no boom and bust. It’s just bust, which is “no boom AND bust.”

  8. Tax System Explained In Beer!

    Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.

    If they paid their bill the way we pay our taxes, it would go something like this?

    The first four men (the poorest) would pay nothing.
    The fifth would pay $1.
    The sixth would pay $3.
    The seventh would pay $7.
    The eighth would pay $12.
    The ninth would pay $18.
    The tenth man (the richest) would pay $59.

    So, that’s what they decided to do..

    The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

    “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.

    The group still wanted to pay their bill the way we pay our taxes.

    So the first four men were unaffected.

    They would still drink for free. But what about the other six men? The paying customers?

    How could they divide the $20 windfall so that everyone would get his fair share?’

    They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

    So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

    And so the fifth man, like the first four, now paid nothing (100% savings)
    The sixth now paid $2 instead of $3 (33% savings).
    The seventh now pay $5 instead of $7 (28% savings).
    The eighth now paid $9 instead of $12 (25% savings).
    The ninth now paid $14 instead of $18 ( 22% savings).
    The tenth now paid $49 instead of $59 (16% savings).

    Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

    “I only got a dollar out of the $20,”declared the sixth man.

    He pointed to the tenth man,” but he got $10!”

    “Yeah, that’s right,” exclaimed the fifth man. “I only saved a Dollar, too. It’s unfair that he got ten times more than I!”

    “That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

    “Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

    The nine men surrounded the tenth and beat him up.

    The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

    And that, boys and girls, journalists and college professors, this is how our tax system works.

    The people who pay the highest taxes g et the most benefit from a tax reduction.

    Tax them too much, attack them for being wealthy, and they just may not show up anymore.

    In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

    David R. Kamerschen, Ph.D.
    Professor of Economics
    University of Georgia

    For those who understand, no explanation is needed.

    For those who do not understand, no explanation is possible.

  9. ^^

    Typical capitalist waffle.

    I have no sympathy for anyone earning over 100k. Pay up or shut up.

  10. Richard Brown, Managing Director, Moneynotion Limi 11th December 2009 at 6:47 pm

    Spot on, just like they did with no boom and bust. It’s just bust, which is “no boom AND bust.”

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