Tax Reforms Create Pay Rise Lottery

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    A significant pensions tax saving could be on the cards for employees lucky enough to get a pay rise this year but, only if their employer brings forward their pay review.

    That’s according to pensions experts at Squire Sanders Hammonds who say the tax saving is only available until 6 April because of the way in which a number of elements of legislation play out in 2011.

    Matthew Giles, a pensions partner at Squire Sanders Hammonds, explains, “Pension saving through many schemes is measured on a 7 April to 6 April cycle which is a day out of sync with the tax year.”

    “In simple terms, it means that if you get a pay rise before 6 April you will be subject to a more generous tax regime than after this date, when tax relief on pension saving will be significantly cut back.”

    For example, for an individual currently earning £50k per annum following 30 years in a 1/60th defined benefit pension scheme, a £10,000 pay rise on 5 April 2011 would have no pension tax consequences. If the same pay rise was awarded two days later on 7 April 2011 he would incur a £13,000 tax liability, far exceeding the salary increase.

    Matthew Giles continues, “We wanted to flag up this issue because we believe it is creating somewhat of a pay rise lottery. Where pay rises are imminent, employers may want to consider accelerating them to avoid these adverse tax consequences for employees.”

    Kath Paddison
    Communications Manager
    Squire, Sanders & Dempsey (UK) LLP
    0161 830 5289

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