Pension reform biggest hit for high earners

THE impact of the pension reforms is the biggest hit high earners will take as a result of the budget.

The loss in terms of tax breaks could be as much as €1,500 per month when the full impact of the reforms kick in over the four years to 2014.

The implications are so severe a lot of people in the high-income category may be forced to “turn to alternative means of savings for their retirement,” said Susan Lynch, tax director with Ernst & Young.

Finance Minister Brian Lenihan said last year “high earners availing of tax incentive schemes must contribute more in the current difficult circumstances”.

The restriction of reliefs “is already having a significant impact. But we can and must do more”.

The National Recovery Plan contains a commitment to the abolition or the curtailment of tax expenditures and the phased abolition of property-based legacy reliefs, he said.

As well as the 16 measures identified in the plan, he said he would “abolish or restrict a further nine reliefs bringing the total to 25”.

Many of them are linked into property investments and patents and some property-based schemes have already been abolished.

Three new measures, in particular, will be targeted at passive investors: restrictions on the carry forward capital allowances will start in 2011 and impact progressively over the next few years.

Also from 2011, Section 23 relief will be restricted to income from Section 23 property, and a “guillotine” provision will ensure that all unused capital allowances after 2014 and Section 23 reliefs are lost, the minister said.

This last provision will effectively terminate all property-based reliefs in 2014, he said.

On the pension reform issue, Ms Lynch said the amount allowed to be written-off against tax would fall from 41% to 20% on a progressive basis over the four years.

Overall, Ernst & Young said the main issues are the changes to pension reliefs and the abolition of various other reliefs flagged in the National Recovery Plan, as well as the removal of the PRSI ceiling which had not been anticipated.