A pension scheme industry body has called on the government to rethink its taxation proposals for the top 1% of earners claiming that they will also hit lower paid workers and cost employers a fortune to implement.
From April 2011, the government hopes to raise an extra £3.9 billion per year from around 300,000 people by phasing out the universal income tax allowance given to anyone earning more than £100,000 and by taxing people at 50% on any earnings over £150,000.
The aim of the pension tax changes is to steadily reduce the amount of tax relief that people making £150,000 per annum can obtain from their own pension contributions. Personnel with gross pay of £130,000 could also be affected if employers’ contributions push them over the proposed £150,000 limit.
But the National Association for Pension Funds (NAPF) has warned that the proposals would generate “high and disproportionate costs” for businesses, which are likely to be 10 times higher than Her Majesty’s Treasury (HMT) estimates.
While the HMT predicts that the total cost of operating the scheme pays regime would be about £110 million per year, the NAPF believes it could be between £420-840 million. Although the Treasury believes that undertaking the necessary manual calculations required under the suggested regime would costs £275 per individual case, the NAPF puts the figure at more like £1,000-2,000.
The organisation also refutes HMT forecasts that providing financial advice and guidance to affected staff would cost employers about £60 million, claiming that it could be as high as £210-500 million.
Scheme managers may also have to upgrade their IT systems at an estimated cost of between £20,000-30,000, while fees to lawyers and actuaries of an average of £400-500 per hour in order to understand the specific impact of the changes on the business would likewise bump up costs.
Nigel Peaple, the NAPF’s policy director, said: “We are asking the government to stop, look and listen. It should stop its plans to introduce an entirely new approach to pensions taxation for high earners, look carefully at our evidence of the threat posed to other pension savers, and listen to our proposals for an alternative approach.”
The body believes that, if workers earning salaries of between £40,000-80,000 receive a promotion, relocation expenses or a redundancy payment they could be caught under the proposed regime.
It is also concerned that senior company pension decision-makers could simply close them, which could further undermine pension provision across the income scale “at a time when workplace pensions are in a fragile state”.
As a result, it suggested reducing the Annual Allowance from £245,000 to between £45-60,000, which would still enable the government to similar amounts of additional tax revenues to its current proposals.