Tax relief on pension contributions: plan of action
Rules governing tax relief on pension contributions introduced in the budget will mean employers will have to think creatively
With the significant restriction to the availability of tax relief on pension
contributions announced in the Budget, individuals and employers will need to
find alternative strategies.
As a consequence, we anticipate people will need advice on three strands of
activity: where relevant, some individuals will be taking steps to reduce income
below the threshold limit of £150,000; tax efficient investments like Enterprise
Investment Scheme (EIS) and Venture Capital Trust (VCT) will attract more
interest; and the demand for advice from employers in relation to flexible
employee benefit schemes will certainly see an increase.
It defies logic to have a situation where someone earning £149,999 receives
much higher tax relief than someone earning £150,000 and it is contrary to the
government’s simplified pension regime introduced three years ago. Nevertheless,
it’s business as usual for those under that threshold.
For some it will be important to plan carefully to reduce the ‘relevant
income’ applicable as it includes all income. Allowable deductions, such as a
relievable pension contribution and Gift Aid donations, can help to reduce the
relevant income below the crucial £150,000 threshold.
More generally, high net worth individuals will find that other tax efficient
investment structures such as VCTs and EISs are increasingly attractive. This is
especially true where there is no tax payable on returns from these investments.
An important and often overlooked consequence from the Budget is that
employers are facing fresh challenges to keep their best performing employees
incentivised.
One way of mitigating the expected drop in take home pay is to bring forward
bonus payments and exercise share options before 6 April 2010. Employee share
plans and employee benefit trusts will play a greater role in ensuring rewards
are delivered in a flexible and efficient way.
Share-based structures can be designed to include any number of share or st
ock options and be tailored for long and short-term incentives. Enterprise
management incentive schemes, for example, allow capital gain on growth to be
deferred. The increased disparity between income tax and CGT rates means that
structures on which the prevailing CGT apply will prove increasingly popular.
The 2009 Budget has dramatically changed the UK taxation landscape, but the
right strategy with good advice should ensure employers and individuals make the
most of the options available.
Richard Phelps is head of advisory and financial
solutions at
Barclays
Wealth Advisory