According to consultancy Hymans Robertson, individuals with pre-tax incomes (excluding employer pension contributions) of £130,000 will be affected by the new legislation. This will hit employees with salaries of around £90,000 once other taxable income is taken into account so the scale of change required, particularly for defined-benefit schemes, is significant and most employers should be planning now if they want to respond by April 2011.
Hymans Robertson claims, depending on the anti-avoidance provisions that emerge over the summer, Cash and Employer Financed Retirement Benefits Schemes (EFRBS) are likely to be the most popular high-earner retirement solutions post April 2011 so traditional defined benefit and defined contribution schemes will no longer be a tax- efficient means of saving for high earners although they may be useful for death and disability benefits. But they make sense for employees on lower salaries, placing pressure on employers to understand the impact of tax relief legislation across the entire workforce.
Commenting, Chris Noon, partner at Hymans Robertson, said: "Unfortunately both employees and employers struggle to understand the hideously complex new rules that the Government has put in place. As the Government has limited tax relief to 20% on contributions for high earners, many people could face an overall tax rate of as much as 70% on their pension. For many senior employees this make a pension an irrelevant form of retirement saving.
"Subject to any anti-avoidance legislation, alternative savings vehicles that are more tax-efficient do exist for high earners that are not difficult to implement. These include share incentive plans, EFRBS and Sharesave schemes. While the Government is looking to introduce even tougher anti-avoidance legislation from April 2011, employers will still be under pressure to develop the right combination of these tax-efficient remuneration methods to be well placed to both retain and attract top talent."
Employers need to rethink their pension provision in light of tax relief changes due to take effect from April 2011
Every employer has been warned to change its approach to pension provision to accommodate high earners due to the proposed changes in tax relief scheduled for April 2011.
