The Government is to allow individuals to make contributions from gross salary into personal pension...
The Government is to allow individuals to make contributions from gross salary into personal pensions and stakeholder.
Group schemes will also have the option of using this deduction basis, but whatever choice they make all members within an individual scheme must use the same contribution basis.
This is to bring the tax regime in line with that on occupational schemes. Tom McPhail, pensions manager at Hargreaves Lansdown, believes it will lead to more high-end business into stakeholder and group personal pensions (GPPs).
Under current occupational pension rules contributions from employees are taken from gross salary. For personal pensions, however, this differs. For a basic rate tax paper the employer deducts it from net pay, the contribution is then grossed up by the pension provider to get the tax relief back from the Government. Higher rate tax payers have to claim the relief back themselves, which is often time consuming and involves long delays.
By bringing personal pensions in line with occupational schemes, higher rate payers may suddenly find their employer's GPP is more attractive. By joining this the higher rate tax payer will no longer have to worry about claiming the tax reliefs themselves, McPhail said.
He added: 'As it will make more sense to organise pensions through employers, intermediaries are likely to drift towards he group end of pensions business as a result of these changes.'
The Government intends both methods used by pension schemes to obtain tax relief on contributions - net pay and relief at source - will continue to be used. However, there must be a uniformity in how this is achieved. The Government has suggested those schemes, which have members who are self-employed must operate relief at source, while a pension scheme only for employees may choose whichever approach it prefers. The Inland Revenue is seeking further consultation on this.
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