Kevin Jenkins from Lichfield based IFA firm, Key Financial
Management believes that the freezes in and removal of personal tax
allowances and the rises in National Insurance (NI) make
contributing into a pension more attractive for the majority of
higher rate taxpayers.
From April 2010 those earning more than £100,000 a year
are to lose their personal tax free allowance at a rate of £1
for every £2 earned.
Commenting on this Jenkins said: "This effectively creates a 61
per cent tax rate for those earning over £100,000 a year,
including their 1 per cent increase in NI contributions. Those
earning more than £150,000 a year will face a 50 per cent tax
rate from April 2010, plus restrictions on how much they will be
able to contribute into a pension."
However, most higher-rate taxpayers can breathe a sigh of relief
as they will still be able to receive up to 40% tax relief on their
pension contributions after April 2010.
Jenkins continued: "If your income is below £130,000 then
you are unaffected by the restrictions on tax free pension
contributions. If your income is £130,000 or more then you
can still get higher rate tax relief on some of your pension
contributions made in this tax year and the following tax
year.
"The NI increases mean that salary exchange, where earnings are
given up for other benefits, such as pension contributions, to
avoid tax and NI contributions will become more popular. In many
cases the employer invests the saved Employers NI contributions
into the pension too. This is a great benefit to the employee which
has no 'real' cost to the employer. For example, an employed higher
rate tax payer would pay £136.33 in Tax and Employees NI to
receive £200 as net pay, with the Employer paying
£42.66 in Employers NI. If the employee paid this £200
into a pension they would be £179.32 better off, at no
additional cost to them, as a result of paying the savings in
Employees NI contributions and Tax into the pension along with the
Employers NI contributions.
"I would advise to make it your New Year's resolution to review
your pension arrangements and find out how much better off you
could be".