Darling attacks high earners again to raise more tax

Chancellor Alastair Darling has complicated pensions for high earners even more by targeting higher tax relief on pensions by changing salary sacrifice rules.

The new rules only apply to those earning £130,000 or more - introducing another threshold into the higher rate income/pension equation.

Anyone earning over  £100,000 a year loses their personal tax allowance and then those earning more than £150,000 will pay 50% tax - both from the start of the next tax year.

Effective from now, anyone earning more than £130,000 is out of the salary sacrifice net - the change is expected to catch 150,000 earners.

‘Salary sacrifice’ is an agreement between an employer and employee to adjust salary in favour of increased pension contributions. The employee making the sacrifice gets tax and national insurance relief on the pension payments in return for making the sacrifice of taking less pay.

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% 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 receive 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.”

Skandia head of tax planning Colin Jelley said: “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.”

As Jelley said, tax and pension planning for those earning more than £100,000 is becoming increasingly complex as the government zeroes on a relatively small sector to fund the tax shortfalls created by the recession.

The issue here is whether the move will actually raise any tax revenue as those earning over the £100,000 are those most easily able to pay for advice to restrict the tax they pay and whether the revenue raised will off set tax and national insurance lost by benefits paid to the increasing tally of the unemployed - and of course, the revenue the government is losing from their wage packets.