💾 Archived View for gmi.noulin.net › mobileNews › 1709.gmi captured on 2023-12-28 at 20:14:57. Gemini links have been rewritten to link to archived content
⬅️ Previous capture (2023-01-29)
-=-=-=-=-=-=-
2009-12-18 08:12:46
Analysis
By Ian Pollock
Personal finance reporter, BBC News
It is now 36 years since the chancellor Dennis Healey told a Labour Party
conference that there would be "howls of anguish" from people who were rich
enough to pay more than 75% tax on their last slice of earnings.
In the popular mind this merged with a similar threat he made the following
year when he said he would "squeeze property speculators until the pips
squeak".
Now, about 300,000 of the highest earners in the UK have just over a year to
get used to the idea that Chancellor Alistair Darling is having another go,
with four separate changes to their taxes.
The changes were announced earlier this year in the Budget and are expected to
raise about 7.5bn a year by 2012-13, according to Treasury estimates.
Details of what may be the biggest change, to pension tax relief, were finally
published in a consultation document issued as part of the recent pre-Budget
report.
For the first time individuals whose gross income is more than 150,000 a year
will be taxed on the value of their employers' pension contributions.
On top of the other forthcoming changes, some of which start next year, high
earners at this level will eventually have to pay an average of 20,000 a year
each in extra taxes.
The changes
From April 2010 a new higher tax rate of 50% will be applied to incomes over
150,000 a year, as previously announced. This will raise about 2.4bn by
2011-12.
At the same time, once someone's income rises above 100,000 a year, they will
gradually lose all of their personal income tax allowance, which currently
shields the first 6,475 of everyone's income from tax.
This allowance will be phased out totally once earnings reach 112,950 and will
raise a further 1.5bn for the government's coffers, according to Treasury
estimates.
But a year later, from April 2011, the top slice of incomes above 150,000 will
be taxed even more.
Tax relief on peoples' own pension contributions will be steadily reduced,
dropping from a 50% rate at 150,000 to just the basic rate of 20% at 180,000
a year or more.
And on top of that these people will have to pay as much as 30% tax on the
value of the pension contributions made by their employer.
Those increases will add a further 3.6bn to the collective tax bill of these
high earners by 2012-13.
Doing the maths
John Whiting, of the Chartered Institute of Taxation (CIOT), has calculated the
sort of extra tax bill some individuals will face.
Take someone who earns 200,000 a year and who makes 20,000 of contributions
to their pension scheme, which are matched by identical contributions from
their employer.
In the current tax year 2009-10 their total tax bill, including national
insurance contributions (NICs) will come to 67,689.
By 2011-12 they will have to pay more as follows:
Tax on employer contributions: 30% on 20,000 = 6,000
Tax relief on own pension contributions reduced by = 4,000
Personal allowance lost = 2,590
Impact of 50% tax rate = 5,000
NICs: 1% extra on 194,285 = 1,943
NICs: increase in start point = 91 saved
Total extra tax = 19,442.
That is a whopping increase in that person's tax bill of 29%, to 87,131.
Huge change
Taxing employers' pension contributions as a benefit-in-kind is a dramatic
change in official pension policy.
The government has a sound reason for this, other than just wanting to levy
more tax on high earners.
It realised that its forthcoming 50% top rate of income tax meant that the high
earners would also automatically receive 50% tax relief on their own pension
contributions.
The current system of pension tax relief means that for every pound they paid
into their pension funds they would be able to knock one pound off their
taxable income, and thus save 50p in tax.
So the government is tapering their pension tax relief from 50% to 20% to stop
that happening, and to stop the highest paid hoovering up even more of the tax
relief given to pension savers.
In the past three years the cash value of all pension tax relief has shot up.
Higher rate tax payers gained 65% of the 28.4bn tax foregone in 2008-09, even
though they comprised only 19% of pension savers.
In fact those people earning more than 150,000 a year now gain 25% of all
pension tax relief, worth an average of 20,000 a year each.
The government is also afraid that cunning higher earners would avoid the new
50% tax rate by asking their employers to cut their pay to below 150,000, but
getting them to pay the difference into their pension schemes instead.
The details of the new pension tax regime in the 115-page consultation document
make one thing very clear - the plans add up to one of the most complicated
changes to the UK tax system yet seen.
And Mick Calvert at the pension advisors Watson Wyatt says many more people
could be affected in due course.
"There is no provision in the proposals for indexation of the income
thresholds," he points out.
"Without such a measure the number of people affected could increase
significantly over time - perhaps more than doubling over the next ten years."
In the second part of his explanation of the government's plans for taxing the
rich, Ian Pollock will look in more detail at the taxation of pension
contributions.