Calculating cost of new higher tax rate; BUSINESS INSIGHTS.

Byline: CAROL CHLEBOUN

BUDGET 2009 saw the introduction of a 50% income tax rate for those earning more than pounds 150,000 per annum, effective from 6 April 2010. While not a complete surprise, many will argue that simply raising the top-rate of income tax for the highest earners will not be enough to plug the black hole, and that more tax rises, a cut in spending, or combination of both must be on the horizon.

In addition the withdrawal of the personal allowance means that taxpayers earning between pounds 100,000 and pounds 113,000 will face a 60% marginal tax rate.

A business issue At first glance, the introduction of a top-rate-tax on income seems to be an issue for the individual, but many businesses will need to re-think remuneration and incentive strategies for their senior teams to ensure they continue to attract and retain the 'right' talent to help them grow.

One possibility that many businesses will be considering is to reward employees with shares. There are a number of HMRC approved schemes available which not only offer the potential for employees to take 'profits' as capital gains but which also help align individuals' rewards to the longer term growth of the business.

Many businesses will also be thinking about the timing of bonuses and dividends. Payment before 6 April 2010 will mean a higher rate charge of 40% (or 32.5% in the case of a dividend), compared to 50% and 42.5% for payment after that date.

What is clear though is that now more than ever is a time for open and honest dialogue and regular communication with employees.

Pension relief changes for high-earners The Chancellor also announced a proposal to restrict higher rate tax relief on pension contributions for those earning more than pounds 150,000 per year, to come into effect on 6 April 2011. Careful consideration will need to be given to how this proposal will affect the occasional high-earner and how it will interact with the lifetime allowance.

Both steady and occasional high earners need predictability and clarity over their entire career to plan sensibly for their retirement. Those who think they may occasionally breach the pounds 150,000 threshold will need to give particular consideration to the timing of their pensions contributions. It may be counterintuitive but a good year earnings-wise under the proposed regime may not be the most tax-efficient time to pay a lump sum into retirement savings.

Anti-forestalling proposals, effective from 22 April 2009, were also announced, to prevent individuals from maximising their pension contributions prior to the 2011 restrictions. Individuals within this category who have not been making regular (defined here as quarterly or more frequent) payments need to be aware that contributions in excess of pounds 20,000 (and possibly pounds 30,000 for some) may not qualify for higher rate relief. Businesses and individuals will need to review their pension policies and structures as the new proposals take shape.

Summary of the changes to income and pensions, Budget 2009 Now Pension contributions above pounds 30,000 prior to April 2011 may give rise to an income tax charge of up to 30% From 6 April 2010 Income tax increases from 40% to 50% for individuals with annual income of over pounds 150,000 Personal allowances for individuals with income over pounds 100,000 will be withdrawn, reducing down to pounds nil for income over pounds 112,950 From 6 April 2011 Employers and employee's national insurance contributions (NIC) will increase by 0.5% Pension contribution relief will be reduced for taxpayers with income in excess of pounds 150,000 For further information contact Carol Chleboun, private client tax director, PricewaterhouseCoopers LLP, Newcastle on tel: [phone], email:[e-mail] or log onto: www.pwc.co.uk/newcastle