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Final salary high earners could be hit by another Budget tax bombshell

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    Final salary high earners could be hit by another Budget tax bombshell

    Final salary high earners could be hit by another Budget tax bombshell

    High earners with a final-salary pension could be hit by a further tax bombshell hidden in the Budget, which would land them with substantial bills for every pay rise.
    By Harry Wallop and Ian Cowie
    Last Updated: 1:18PM BST 28 Apr 2009

    Already subjected to the new 50p tax rate announced by Alistair Darling last week, many could now face six-figure tax bills on relatively small increases in salary because of the way final salary schemes are valued.

    This would be the third blow to the pensions of high earners from the Budget, and one that could prove another nail in the coffin for final salary schemes.

    High earners, with salaries above £150,000 a year, will not only lose the generous 40 per cent tax relief on their own pension contributions, announced by the Chancellor last week, they will also have to pay tax on their company's contributions, the small print of the Budget revealed.

    In a further development, tax experts say this tax bill could prove highly costly for those workers lucky enough be a member of a final salary pension scheme.

    That is because these pensions are a guaranteed annual income for their rest of their life, based on their salary – not on how much they or their company contribute.

    As a result, every time they enjoy a pay rise, their pension increases. As an employee, they will have to pay tax on this "contribution" from their company, the Treasury has confirmed.

    However, the Revenue values the contribution as if it were a lump sum large enough to generate the pension for the rest of their life – the "actuarial valuation" as experts call it.

    Mike Warburton, leading tax expert at accountants Grant Thornton, said: "This will come as a really nasty surprise to high earners. The implication is that they could be landed with a series of enormous tax bills in the final years before they retire."

    For instance, someone earning £200,000 a year, who received a £6,000 pay rise, could be handed a tax bill of £24,000 – or four times the value of the pay rise.

    Typically, a worker retires enjoying an annual pension the equivalent of two-thirds of their salary, as a result a £6,000 pay rise equates to an extra £4,000 a year in their pension.

    The actuarial value of an extra £4,000 a year pension could be about £80,000, according to Mr Warburton – because you need a lump sum of at least £80,000 to generate an annual income of £4,000.

    The Budget said high earners will have to pay tax of 30 per cent on company pension contributions, which would work out at a tax bill of £24,000 – just for a £6,000 pay rise.

    This move – which the Treasury says is up for consultation – would hit most chief executives as well as a number of senior civil servants, the prime minister and leaders in local government.

    A total of 290,000 people earn over £150,000 a year, with more than a third of them enjoying a final salary pension scheme, Mr Warburton estimates.

    Nigel Waterson, the shadow work and pensions minister, said: "It seems to me that this is another disincentive to pensions savings. This isn't about targeting fat cats, this could produce a hugely inflated tax bill for those who have done the right thing and saved for retirement."

    The Treasury said they had not worked out how they would calculate the tax workers would have to pay on final salary schemes. "We recognise that there are differences between the two types of pension schemes. Our aim is to be fair to both and we are consulting on how to do that," a spokesman said.

    Ros Altmann, a former pensions advisor to the Government, said there would be an outcry from the senior civil servants, all of whom enjoy the security of a final salary pension scheme.

    "They will be up in arms. I can't see the leader of Bedfordshire county council or the director of finance at the Environment Agency, or whoever, will let this happen."

    Mr Warburton added, however, that the Government could not be seen to "go soft" on final salary pension schemes. "HM Revenue cannot let them off Scot-free or it will be accused of treating final salary pensions differently from money purchase schemes. In its haste to introduce this new tax, the Treasury has not thought through the implications."

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    This Govt is truly retarded - it makes shaun-bhoy an Einstein!

    #2
    Originally posted by AtW View Post
    Final salary high earners could be hit by another Budget tax bombshell
    While I don't agree with the "tax relief" changes (as they will no doubt reducing the ceiling in the future), I am glad that it has been applied equally. I thought that higher paid public sector employees were going to get off scot free.

    After all they don't have a pension fund per see - just an iron clad promise that the government will take money from future taxpayers to pay their pensions.

    Seems like they are calculating the equivalent benefit and taxing them accordingly.

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      #3
      Originally posted by centurian View Post
      Seems like they are calculating the equivalent benefit and taxing them accordingly.
      So you think it's okay to ask for £24k extra tax when you get £6k salary increase?

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        #4
        Forget the PS parasites. This will mainly effect successful private sector high earners who have created real wealth and prosperity for the country. Most people seem to hate them for being successful anyways.

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          #5
          The great irony is that those people are paying actually lots of taxes already and by having private pension and most likely private medical services they reduce cost of them to the state.

          Retards in the Govt should be jailing people like Sir Fred the Shred and confiscating their property to pay off victims of mismanagement rather than apply blanket tax on rich people.

          IMO all this small print that is only coming out now is worse than 40->50% increase in income tax. It is particularly ridiculous to ask for big lump sum in advance as tax when you will only get benefits of pension many years in the future and possibly never if you die, would the Govt pay back this pension tax if you die too early?

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            #6
            HMG hit private pensions but do nothing to reduce the public pensions timebomb. Currently the deficit is 4.5 Billion this year which has to be made up by taxpayers because public sector employees in many cases contribute nothing personally and public sector employers pay a reduced NI level to private employers.
            This is a massive pensions apartheid and discrimination and the Tories have promised to solve this crisis of Labour's making.

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              #7
              Originally posted by AtW View Post
              IMO all this small print that is only coming out now is worse than 40->50% increase in income tax. It is particularly ridiculous to ask for big lump sum in advance as tax when you will only get benefits of pension many years in the future and possibly never if you die, would the Govt pay back this pension tax if you die too early?
              That would not be logical. The benefit that you receive is the existence of pension provision, not the actual payments of the pension. This benefit is received now, whether you live to collect the payments or not.

              I agree with you about the small print though, that's always the worst of the Budget.

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                #8
                Originally posted by Cyberman View Post
                HMG hit private pensions but do nothing to reduce the public pensions timebomb. Currently the deficit is 4.5 Billion this year which has to be made up by taxpayers because public sector employees in many cases contribute nothing personally and public sector employers pay a reduced NI level to private employers.
                This is a massive pensions apartheid and discrimination and the Tories have promised to solve this crisis of Labour's making.
                How can anybody "solve" it?

                1. The pensions due to public sector employees are due. They are part of the deal. How lightly do you renegue on deals, Cyberman? And please don't tell me that you personally never made the deal, or I'll have to tell you how representative government works.
                Can the employer now go back and change the employment contract retrospectively just because we now think that it was too generous? How about a private sector employer deciding that the salary it paid you 5 years ago was too generous, so they will now have half of it back? That's what it would be like.

                2. most public sector pensions work exactly the same way as private sector pensions except that the employer is allowed not to have a fund because of the special power of this employer to raise funds as needed. The employee normally does contribute.

                3. The public sector employer, i.e. the government, i.e. the people, was allowed to run a pension without a fund, because it could raise the money later. The employer, i.e. the government, i.e. the people, benefitted at the time from the use of both the employees' actual contributions and the employer's notional contributions, since it could spend or invest that money instead of saving it in a pension fund. We gained from that money (or, if you like, the govt frittered it away) and now the bill is due. That's all.

                Remind me not to lend a tenner to anyone who thinks that it's OK to welch on paying back, because it doesn't look like such a good idea now.

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                  #9
                  Originally posted by expat View Post
                  This benefit is received now, whether you live to collect the payments or not.
                  No, that's total rubbish - you don't receive benefit of pension until you retire: where as they tax you a big lump sum NOW according to new rules, that's total bull.

                  It's bad enough this pension con prevents people from getting hands on their own money until they retire, but now they would take huge tax which may well be abolished in a few years, yet nobody will give you a refund, that's total bull given that you might not live enough to use that "benefit".

                  Originally posted by expat View Post
                  That would not be logical. The benefit that you receive is the existence of pension provision, not the actual payments of the pension.
                  The benefit is deferred big time - if Govt wants to tax it then they should wait until point pension is in effect and tax income from it.

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                    #10
                    Retards in the Govt should be jailing people like Sir Fred the Shred and confiscating their property to pay off victims of mismanagement rather than apply blanket tax on rich people.


                    Dont feel sorry for the Rich Atw - remember back in 1980 the taxrate for the top earners was 90 per cent - theyve been on a massive roll for a long ling time and benefited from a property boom - theyve been asked to cough up a wee bit more to help the country due to an economic collaspe caused by other reckless rich people in the Shadow Banking Sector.

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