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Salary sacrifice is one ray of pension light

By John Lawson

Those expecting a pre-Budget Report encouraging savings will be sorely disappointed.

As expected, the Government has taken another swipe at pension tax relief in the run-up to next year’s general election. Now, anyone earning more than £130,000 will be caught.

Previously, the effective limit was £170,000 because £20,000 of your own pension contributions could be deducted in determining whether “relevant income” exceeded the £150,000 threshold.

Personal, but not employer contributions count towards the new £130,000 limit. Those who exceed £130,000 on this measure also have to count employer contributions towards their total.

These changes have immediate effect and the anti-forestalling rules are amended accordingly.

The top rate of special ann- ual allowance charge is increased to 30 per cent from April 2010 but only where tax relief is given at 50 per cent.

Where tax relief is 40 per cent (on taxable income between £130,000 and £150,000), the charge will be 20 per cent.

Until April 2011, people caught by these rules should make hay. The anti-forestalling rules allow everyone affected to pay £20,000 in this and next tax year, or more if they have a history of regular monthly, annual or single contributions.

After April 2011, the decision to stay in a pension scheme will hinge on the rate of tax paid on pension income. Those paying 50 per cent on pension income are most likely to seek out alternatives such as a cash bonus or joining an employer-funded retirement benefits scheme.

There is a new choice over who pays the special annual allowance charge. This was originally charged to the individual through self-assessment but a new option of payment by the pension scheme, with a mat- ching reduction in benefits, is proposed.

For the optimists, the one ray of pension light is that salary sacrifice is now more attractive, but only due to the 1 per cent hike in National Insurance. Personal rates go up to 12 per cent and 2 per cent and the employer rate goes up to 13.8 per cent in 2011/12.

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