High Earners Face Tax Penalties on Pension Contributions

Taxpayers earning more than £150,000 who make pension contributions based on business profits face even more tax penalties on their income.

Already hit by the new proposed super tax rate of 50% , now, a misunderstanding between the opposition and government has left the way open for the government to implement the ‘anti-forestalling’ tax on one-off pension contributions of 20% to stop high earners maximising pension contributions before April 2011.

The Tories withdrew proposed amendments to anti-forestalling in the Finance Bill believing the government would change the clause.

The Treasury has backtracked leaving those affected little time to assess their level of contributions for the current tax year.

Stephen Timms, financial secretary to the Treasury said the current measures were necessary to ensure ‘fiscal neutrality’.

He added that the extra tax revenues from high earners making annual pension contributions could offset some of the revenue it expected to lose as more people move to maximise their contributions up to £20,000 over the next few years.

The late rejection of the measures by the Treasury has given industry groups little or no time to propose an alternative before the Finance Bill is drafted.

Pressure groups representing insurers, pension funds and other financial groups, argue that self-employed people, who tend to make one-off annual contributions to their pension schemes once they have established their incomings, will be caught out by government plans to base the contributions history of a scheme member on monthly or quarterly contributions.

They wanted the government to amend the Finance Bill to allow the contributions history for self-employed people to be based on the highest two years contributions out of the last three years.

“Stephen Timms was making the point that the key issue was to maintain a fiscal neutrality,” said the chairman of the Association of Member Directed Pension Schemes, Robert Graves.

He added that the groups were frustrated at being told the government’s stance so late in the consultation process.