Government plans for a high earners tax which will increase pensions taxation on those earning over £130,000 are likely to hit many earning much lower salaries, according to the National Association of Pension Funds (NAPF).
NAPF quotes as an example an accountant on a basic salary of £70,000 per year, a car allowance of £8,000, plus other bonuses of £2,000 a year. He is also eligible for a performance-related bonus of £35,000.
He has also been contributing to the direct benefit company pension scheme for 20 years.
The accountant receives a promotion which increases his earnings by £10,000 per year. He has also met his performance targets, bringing him a bonus of 50% of base salary and bringing total income to the threshold level of £130,000.
At this level, the deemed value of his employer contributions to the company pension scheme are added to current income, to establish gross income.
As he is in a good DB scheme, this is calculated at £54,000 bringing gross income to £184,000.
This gross income now makes the accountant subject to a tax recovery charge of £14,200 – higher than his £10,000 per year salary increase.
The levels of payout under the UK state pension are inadequate for the majority of people to live in comfort throughout their latter years, and therefore contributions into private pensions – either personal or corporate – are recommended by the government and pensions specialists alike, in order to supplement the state pension income.