This week Shadow Chancellor, Ed Balls, announced plans to restrict pension relief to 20% for those earning more than £150,000. Current pension contributions are grossed up by 20% but investors subject to the higher (40%) and additional (45%) income tax rates can achieve effective relief at their marginal rate as pension contributions can be offset against taxable earnings.
This is disappointing news because as research commissioned by Bestinvest last year revealed, 34% of those surveyed were discouraged from investing in a pension because they don’t trust politicians not to continue meddling with them. After all, the latest reductions in the annual and lifetime pension allowances have yet to take effect, and many in defined benefit schemes will be oblivious to the fact that that they will immediately be in breach of the revised £1.25 million lifetime allowance when it becomes effective on 6 April 2014.
However, the good news is that proposed policy is also likely to be unworkable. That’s because potentially affected individuals may be able to legitimately agree salary sacrifice arrangements with their employers, for example through a reduced bonus or salary, in lieu of a company contribution into their pension.
Salary sacrifice is already beneficial for both employers and employees through reductions in the cost of National Insurance Contributions. By reducing an individual’s taxable earnings through salary sacrifice, an individual can effectively achieve the same thing as pension relief at their marginal rate.
Indeed salary sacrifice is also especially attractive for those who expect to earn between £100,000 and £118,000, as this is the range where the annual tax-free personal allowance is removed, so by reducing earnings through salary sacrifice the effective relief could be equivalent to 60% relief.
For more information on pensions, visit the pension section of our website.