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Taxing times

Advisers need to start planning for high-earners’ tax changes

The pre-election Budget lived up to expectation as a bit of a damp squib. With nothing to give away and not wanting to announce further tax rises just before an election, the Chancellor spent an hour saying next to nothing. There was little more of substance in the fine print.

As expected, the Government intends to legislate in the 2010 Finance Bill to implement new pension tax charges for high-earners with taxable income, including their own pension contributions of £130,000 or more and with gross income of £150,000 or more. Gross income is taxable income plus the value of employer pension contributions.

The rate of tax charge will be 1 per cent for each £1,000 that gross income exceeds £150,000 with a cap of 30 per cent for people with gross income above £180,000. A smoother taper based on a rate of 0.001 per cent for every £1 of income over the limit was rejected.

The tax charge applies to the combined value of personal and employer pension contributions and will be applied from April 6, 2011. Unlike the anti-forestalling rules we currently live with, there is no £20,000 allowance or protection for people with a history of higher contributions.
The Finance Bill will become law before the general election, so we are now reliant on a future administration to undo these complex new rules and put something simpler in place.

But even if the Conservatives win there is no guarantee of a reversal. The Tories see these changes as a political trap as a reversal could be branded as a move to support the wealthy – a charge they are at pains to avoid.

The LibDems’ official policy is to scrap all higher-rate tax relief, so support from that quarter for a more pragmatic solution can be discounted.
Advisers have to get to grips with these complex tax changes so they can advise high-earning clients.

Among other proposals was a signal that HM Treasury is prepared to consider commutation of small personal pension pots to bring these into line with a similar policy for occupational schemes that came into force last year. The Treasury has also said it is willing to consider allowing married couples with small pension pots to combine their savings to get a better annuity rate.

No mention was made of increasing the rate of capital gains tax. This had been widely touted given the disparity between income tax and CGT.

However, anti-avoidance measures will be put in place for employee benefit trusts which are used to avoid income tax and National Insurance. Advisers considering these as an alternative to pensions for high-earners take note.

John Lawson is head of pensions policy at Standard Life


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