Pre-Budget report: Employer pension contributions will count towards higher earners’ taxable income

Chancellor Alistair Darling has announced in his pre-Budget report that employer pension contributions will count towards the definition of income for the higher-rate tax measure for those earning more than £150,000.

In this year’s Budget Darling announced that he would reduce pension tax relief for people with incomes over £150,000, saying that the highest earners benefit disproportionately from tax relief on pensions.

He said today: “I want do this as fairly as possible, and treat individuals the same regardless of whether they receive their pay as current salary or as a future pension benefit, and prevent avoidance.”

Darling said he would introduce a floor, so that irrespective of the size of employer pension contributions, no one with an income below £130,000 will be affected.

He said the additional money will be used to pay for extra measures like help for the young and older unemployed to get back into work.

Reflecting this change, the government announced that the anti-forestalling measures introduced in this year’s Budget will be extended from 9†December 2009 so that all those with incomes of £130,000 and over will be subject to the special annual allowance.

Mark Duke, head of pensions at Towers Perrin, said: “To hit the Government’s tax gathering target, it has been decided to increase the affected group by around 30%. This has been achieved by counting company pension contributions as income when testing whether someone has breached the £150,000 per annum threshold.”

Marc Hommel, partner and pensions leader at PricewaterhouseCoopers, said: “The government seems to be dismissing the notion that taking higher earners out of workplace pension provision will have dire consequences for employer motivation to provide quality pensions to the rest of the workforce. †

“In the weeks following last April’s Budget, over three-quarters of employers said that the government’s pension tax proposal for higher earners was further reducing companies’ motivation to provide wider workplace pensions, and this has been since borne out in practice by the weekly announcements of closure of existing quality pension schemes. Today’s announcement that employer contributions will now also be included in higher-rate tax relief restrictions for people earning £130,000 or more, together with the associated administrative complexity, will result in further acceleration of scheme closures. “

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