Additional taxes on top earners confirmed

Three measures that will increase the income tax burden on the highest earners are 50% income tax on incomes over £150,000; no personal allowances for people with incomes over £100,000 and the withdrawal of higher rate income tax relief for pension contributions once income exceeds £150,000 were all confirmed, as expected.

Baker Tilly analysis

It was never likely that any of these measures would be withdrawn but the restriction on pensions tax relief had attracted considerable criticism. That criticism was not aimed at the restriction in relief itself.

The worst aspect of the new pensions rules is the awful mishmash that is anti-forestalling provisions.

In detail

These rules were introduced to discourage pension contributors from making additional contributions in 2009/10 or 1010/11, for example, before the principal restrictions come into effect on 6 April 2011. The need for restriction on higher rate relief was dubious, given the absolute restrictions on pension contributions tax relief introduced on 6 April 2006 (A Day). The anti-forestalling rules purport to enable continuity of regular contributions but they do not, failing to recognise contributions:

• paid less frequently than on a quarterly basis; and
• with only a few, lately and grudgingly introduced concessions to different providers.

Failure to even address those anomalies represents a serious oversight.

The worst is still to come after 5 April 2011 when high earners whose employer contributions have continued to get relief during the
anti-forestalling years (on the basis that they were in place before 22 April 2009) will be hit with an income tax charge. They will need to review their employers’ contributions before April 2011.

The 50% additional rate which comes into effect on 6 April 2010 will be the top rate of tax for the foreseeable future. It applies to all income other than dividends which are taxed at the dividend rate of 42.5%. After allowing for the 10% tax credit that is added onto net dividends that will mean that the effective additional tax rate on dividends will be 36.11% of the net dividend received.

Personal allowances will cease to apply to incomes in excess of £100,000, again with effect from 6 April 2010. Once a person’s income exceeds £100,000, their personal allowance is reduced by one pound for every two of income over the £100,000 threshold.