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Taxation of high earners: What it means for employers and employees

Last updated: 6 November 2009

As part of the Budget speech in April, the Government announced radical plans to increase the taxation of high earners. Mercer believes these tax changes will potentially result in the biggest shake-up of UK reward and HR strategies for high earners for many years – affecting more than 500,000 employees over the next 18 months.

The proposed changes include:

Effective immediately:

Introduction of “anti-forestalling” regulations to prevent individuals paying too much into pensions before April 2011

Effective from April 2010:

Introduction of a higher tax band, with a tax of 50% on incomes above £150,000 per annum

Elimination of the entire personal tax-free allowances on incomes above £113,000, with staged removal from £100,000

Effective from April 2011:

A tax charge on high earners, not only on their own pension contributions but also on those paid by their employers on their behalf

Increase in employer and employee National Insurance contributions by 0.5% p.a.

The changes will have an impact on senior employees with high incomes. It is likely that these employees will have an expectation that their employer will help support them in identifying alternative solutions.

How companies respond to this issue will define their employment brand for senior employees in key roles within their organisations in the coming years.

'What does this mean for senior employees and for employers?'

How Mercer can help

Mercer’s expertise across the full spectrum of reward programmes (both design and delivery) and our ability to provide senior employees with financial advice/education programmes makes us ideally placed to support employers in minimising the impact of these proposed changes.

Immediate actions we are proposing employers take include:

Develop a strategy towards these changes now and implement during 2010.

Recognise that different solutions are required for different employees – with a first step towards identifying which employees are affected and by how much.

Understand the implications of these proposed changes on future workforce mobility, employment branding and succession planning, and consider alternative levels/mix of rewards being offered to employees.