The Inland Revenue has confirmed that Budget changes to the taxation of trusts would boost capital gains tax on "top-up" pensions paid to senior employees from 23 to 34 per cent.
Accountants are sharply criticising the Government for failing to include explicit mention of the tax increase in any of the press releases put out when Gordon Brown made his Budget speech two weeks ago. Some say the move was a surreptitious tax raid on the wealthy.
The top-up pensions, known as funded unapproved retirement benefit schemes (Furbs), are used by employees earning more than the Revenue's cap on earnings which qualify for tax relief, currently pounds 87,600.
The schemes are increasingly used as a tax-efficient way to reward senior employees approaching retirement. Companies pay tax at 40 per cent when they make contributions into these special pensions. But until now they have enjoyed a preferential rate of CGT of 23 per cent on the growth of the funds, rather than the higher rate of 34 per cent. Payouts from the pensions are tax-free.
Information released on Budget Day made no mention of Furbs but did change the law to levy capital gains tax at 34 per cent on all trusts. Until now, Furbs, a particular type of trust, enjoyed exemptions from the higher rate of CGT.
While no exact figures are available, accountants estimate that more than 2,000 people use the arrangements. Most are highly paid executives at the country's top 350 companies and earn well into six figures.
The accountants KPMG say companies will have to increase contributions rapidly for senior employees in order to make up for the change.
Mary Carter, remuneration tax partner at KPMG, said: "Companies will need to review urgently the rate at which their contributions are made and consider increasing this rate to avoid employees being very materially disadvantaged."
The schemes have grown in popularity as executive pay rises have raced ahead of inflation. Because the earnings cap only rises in line with the retail price index, increasing numbers of employees now earn more than the cap.
KPMG calculates that a 44-year-old employee, whose company contributed pounds 15,000 a year until retirement at 60, can now expect pounds 48,000 less to retire on.Reuse content