Corporate pension savers hit by Budget changes

Corporate pension savers will have to increase their contributions to maintain the same level of benefits following the changes to income tax confirmed in the Budget.

The Budget rubber-stamped changes to income tax and National Insurance (NI) first announced by Gordon Brown last year. The main changes, which take effect from April 2008, are the 10 per cent starting rate of tax is scrapped for pensions and earned income, the basic rate of income tax is reduced by 2p to give a new rate of 20 per cent and the ceiling for paying the standard 11 per cent rate of NI contributions will rise sharply, by £3,900 over and above the normal inflation-linked increase.

This means that the main NI rate will now apply to income up to £40,040 a year, compared to a threshold last year of £34,840.

Advisers say the steep rise in the amount of salary attracting NI means that salary sacrifice will become considerably more attractive to those earning at or around the £40,000 bracket.

But the changes will also have differing effects in the take-home pay of staff, with those earning £15,000 a year or less likely to be worse off. By having more of their income taxed at 20 per cent, rather than 10 per cent, they will pay more in tax. Someone earning £8,000 will be around £12 per month worse off.

Andrew Tully, senior pensions policy manager at Standard Life says: ‘The tax and NI changes being introduced in April are more about simplifying the number of rates and bands than cutting tax bills, so some people will gain a little and some people will lose a little. By paying additional pension contributions before April people can get more money into their pension pot, as the Government will add a greater amount of tax relief. People can also reduce the tax burden imposed by the increase to National Insurance by using salary sacrifice arrangements to pay their pension contributions.’

David Marlow, marketing director of Alexander Forbes Financial Services says: “The Budget was a bit of a non-event really. There was not that much in it that we didn’t already know.

“But the increase in the top NI threshold is way above inflation and clearly makes it a refreshing time to talk to clients about salary sacrifice. There is always that veiled threat that salary sacrifice will be taken away from us, particularly the more attractive it becomes as a tax-saving solution, although I think it is safe for the moment.”