Extra pension tax charges for high earners

A detail in the Budget announcement has revealed that people who earn more than £150,000 a year will have to pay tax on the contributions that their employers make to their company pension schemes.

The Treasury has said that employers' contributions for top-rate taxpayers are to be taxed as benefits in kind as from 2011.

However, the new rule does not cover people in company pension funds whose earnings are below £150,000 a year.

The Budget has already restricted the relief that top-rate taxpayers can claim on the contributions they themselves make to their pensions.

Anyone earning over £150,000 will see their relief reduced on a tiered basis from 40 per cent until the relief reaches 20 per cent, the same as basic rate income taxpayers, for those earning £180,000 annually.

A Treasury spokesman said of employer contributions: “It’s deferred salary and will be taxed at a flat rate of 20 per cent.”

In the case of a money purchase scheme, this will represent a tax payment of £2,000 on a £10,000 contribution.

But the issue becomes more complex with final salary schemes, where benefits are added on in the form of years. This could result in a higher tax charge.

The concern is that the new measure will jeopardise many final salary pensions schemes that are already under pressure.

Mark Edwards, the senior director taxation at the Association of British Insurers, said: “If this is going to add even more complexity to administering a scheme, there will be further impetus to close schemes.”