New pension rules to hit higher earners
New pension rules to hit higher earners with 'matching' pension contribution arrangements or those receiving over £50k pa in employer contributions
Employer pension contributions will inadvertently take many individuals over the new pension contribution threshold, says Mike Fosberry, director at Smith & Williamson, the accountancy and investment management group.
Thousands of higher earners who have signed up to matching pension contributions with their employer could lose out under new pension rules to apply from 6 April 2011.
"This seems to be an area which employers and individuals are overlooking and we have been helping quite a lot of people – and their employers – to resolve this issue," says Mike.
He continues: "We are finding that employees may have signed up some years ago to, say, £30k pa of matching pension contributions with their employer to give a total contribution each year of £60k. Providing payments were made on at least a quarterly basis and fully documented, HMRC would have accepted this and such contributions would not have fallen foul of the anti-forestalling rules."
"But now individuals must urgently renegotiate such arrangements. Anyone who thinks they could be caught by the new rules because of their employer contributions needs to sort out the detail before 6 April 2011. It may mean renegotiating their remuneration and reward contract."
"Under the new pension rules, tax privileged pension contributions are capped at £50,000 pa. This upper limit applies to the combined employee and employer pension contributions so if a high earner is receiving substantial contributions from his employer and also putting in money himself , he could inadvertently go over the threshold. We are finding that this will impact upon many employees."
"Although sums above £50k pa can be put into a pension, the individual will not get tax relief on contributions over £50k so they will generally be better off taking any extra remuneration as cash and investing it in alternative savings vehicles such as ISAs."
The change in rules will also hit those who receive an employer pension contribution of over £50k pa next financial year, even if they do not make personal contributions into their pension arrangement.
A feature which may be helpful to many is the new 'carry-forward' rule which means that any unused pension contributions (within the £50k annual allocation) can be rolled forward for three years. Therefore, if people have not paid in £50k per year in the tax years 2008/09, 2009/10 and 2010/11, they can roll any unused relief forward to 2011/12 and make those extra contributions as long as they were a member of a registered pension scheme throughout that period.
"However, once people are up to their maximum of £50k per year pension contributions,
"One practical point to remember is that if the individual's spouse is not in paid employment, it is still possible to contribute up to £3,600 per year into a pension scheme on his/her behalf with the benefit of basic rate tax relief ."
"The new tax rules have created a major trap for those earning between £100,000 - £114,950 per year. At this level the marginal rate of tax will shoot up to 62% (including employee NICs and income tax) so pension contributions via a salary sacrifice scheme to take your income below the £100,000pa threshold can prove particularly worthwhile. However, proceed with caution and get professional advice."