Chancellor Alistair Darling’s hope of raising around £1.6bn a year from 2011 from a new 45% income tax on earnings above £150,000 a year, and abolishing the personal allowance for those earning more than £100,000, could backfire, says Jennifer Hill in The Sunday Times. Accountants are already scheming to help higher-earners. Standard Life says that “using pension contributions to offset the new upper rate could, in fact, cost the Government up to £2bn a year in tax relief”. That will happen if, say, 250,000 of the estimated 360,000 people earning more than £150,000 invest an extra £10,000 a year into their pensions.
Pensions, then, are a good way to avoid the higher tax. If you were a member of an occupational pension scheme and earned £200,000, making a £50,000 contribution out of gross income would allow you to avoid the 45% tax altogether. Those with private pensions would need to make a net contribution of £40,000 (this would be grossed up to £50,000 with basic-rate relief) and then claim a further £12,500 (25%) back in their tax return. Note that, as of 2010, the minimum pension age is 55.