Recent pension changes for high earners
New income tax and pension rules introduced in the 2009 Budget will affect anyone earning over £100,000 – and I cannot stress urgently enough that people in this bracket should be seeking professional advice before the end of the 2009/10 tax year in April 2010.
In short, anyone earning over £150,000 a year will pay 50% income tax from 2010/11. Furthermore, the removal of higher rate tax relief on pension contributions could affect anyone earning over £130,000. To soften the blow, contributions up to £20,000 per annum will still get full tax relief this year and next year. Hence, as a bare minimum, high earners should be looking to take full advantage of this ‘use-it-or-lose-it’ allowance while it is available.
Furthermore, anyone earning over £100,000 will find his or her basic personal allowance scaled back by £1 for every £2 earned over £100,000. By making additional pension contributions (which still qualify for higher rate relief), there could be a double benefit in that the overall income tax payable could be reduced at the same time. Effective tax relief of up to 60% is achievable.
However, the definition of earnings is not straightforward. The system looks at current earnings as well as earnings in the past two tax years, while also taking existing pension arrangements and previous contributions into account.
If you think you might fall within any of these definitions, Kennedy Black would be delighted to discuss any of the above at your earliest convenience.