These changes are:
Income tax rate changes with effect from 6 April 2010
- A new 50 percent income tax rate for employees earning more than £150,000.
- A tapering of personal allowances for employees with taxable income of more than £100,000.
- An effective income tax rate (due to the tapering mentioned above) of 60 percent for employees earning between £100,000 and £112,950.
Tax relief on pension contributions
- With effect from 6 April 2011, a restriction of tax relief on pension contributions for individuals earning more than £150,000.
- Anti-forestalling measures, effective from 22 April 2009 to prevent tax relief on irregular contributions ahead of the introduction of the tax relief restrictions.
What are the impacts?
As companies have digested the implications of these tax changes, many have begun to see the impact on key executives and mobile talent as a priority commercial issue. While the 50 percent tax rate alone might have been manageable, the combination with the further restrictions on the effectiveness of registered pensions for higher earners means that existing arrangements will need to be reviewed for effectiveness and competitiveness.
We are seeing a great deal of activity in this area as clients look to manage the impact on their businesses.
What are businesses doing?
Our view is that the best approach is to step back and evaluate the total cash and equity based remuneration arrangements for executives to see whether they remain fit for purpose, identifying short term as well as longer term strategies. These strategies vary in their complexity and effect. However, particular issues we have been seeing groups looking at and that we have been assisting them with, include:
- Assessment of potential impact including comparative modelling and communications to employees;
- Acceleration of bonuses and other payments into the current tax year;
- Review of pension arrangements and how best to structure these going forward bearing in mind recent legislative changes;
- Bonus waivers, in favour of more tax efficient rewards;
- Greater use of share plans, both approved and unapproved and including sub-plans, which can result in capital treatment on eventual gains delivered, but taking account of the company law and shareholder restrictions on the adoption of new plans under which executives may benefit; and
- For appropriate groups with a particular objective, structuring bonuses to provide longer term rewards in capital form to more effectively incentivise and retain employees.
