UK's Top Earners Face GBP18,000 Tax Rise

by Robert Lee, Tax-News.com, London

30 April 2010

At a recent seminar on mitigating the effects of the 50% income tax rate and other forthcoming changes to UK tax laws, Punter Southall Group has commented on the ramifications of the UK’s changing landscape for the country’s highest paid.

“One year on from the Chancellor’s April 2009 budget, in which the proposed changes to pensions tax relief were first announced, thousands of higher income earners face material reductions in their net income from April this year onwards, as the initial impact of a raft of tax changes hits corporate payrolls,” the firm said.

Next year, from April 2011, the introduction of restrictions on pensions tax relief for higher earners, among other measures, will make another significant dent, the firm noted. Analyzing the effects on someone earning GBP175,000 a year, for example, Punter Southall said the effect on this group of taxpayers would be five-fold:

• Their personal allowance will be eroded completely;
• They will be paying 50% tax on income above GBP150,000;
• Their National Insurance Contributions will increase;
• They will face an effective tax charge on their employers’ pension contributions;
• They will suffer reduced tax relief on their personal pension contributions.

The firm notes that the cumulative effect of these changes will mean that an individual who earns GBP175,000 and whose employer contributes 15% of salary to their pension could be around GBP18,000 a year worse off. This change to the UK regime, Punter Southall notes, may even compel companies to identify individuals who will be affected, and review remuneration and fringe benefits accordingly.

Henry Denne, Head of Private Clients at Punter Southall, commented:

"Although the changes to pension tax relief do not hit high earners until April 6, 2011, the first part of the impact of the tax changes will be felt in the pockets of many of the very people who wield most influence on the future of corporate pensions. For example, our calculations suggest an individual earning GBP120,000 will be around GBP2,400 a year worse off as result of the erosion of their personal allowance in the current tax year. This will rise to GBP3,600 next tax year as the impact of the increase to national insurance takes effect.”

“The financial impact is proportionately greater for higher earners who will also be subject to the restriction of pension tax relief and I would urge individuals to review their own finances to maximize their use of tax allowances and tax efficient investment vehicles.”

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