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Promoted school leaders could face £30K tax bill due to pension changes

Dozens of school leaders have been hit with unexpected tax bills of up to £30,000 as a result of pay rises they were awarded several years earlier.

A leading accountancy firm told TES that it had been contacted by around 20 school leaders who have been hit by four- and five-figure bills stemming from changes to tax rules imposed by the government.

Anjali Kothari, a partner at accountants Kingston Smith, said that the move to reduce the annual tax allowance for pension contributions had created a “timebomb” for some senior teachers, and warned that many more could be affected.

“Teachers are being caught out by the government’s decision to reclassify the annual allowance,” she said.

“They just don’t realise that a large [tax bill] could be coming their way. The unions don’t understand the problem, so teachers aren’t being warned. It’s a timebomb for senior teachers.”

The teachers who sought advice from Kingston Smith had previously all received a significant pay rise as a result of a promotion; several years later, they received tax bills of between £5,000 and £30,000.

As a result of the introduction of the new performance-related pay system in schools, Kingston Smith believes that even more teachers could be affected in future.

“It could be someone who has moved from head of department to deputy head, or deputy to head,” Ms Kothari added.

The problems have been caused by the annual tax allowance for pension contributions being cut from £255,000 to £50,000 in 2011/12. As a result, anyone whose overall pension pot increased by more than £50,000 in value within a year would be liable for an unexpected tax bill. This would be deducted from their pension pot.

The consequences are not always felt immediately, however: some teachers have been protected by unused allowances left over from previous years, meaning their tax bill only materialised several years later.

“One client found that, three or four years [after being promoted], they had been hit by a £10,000 tax charge,” Ms Kothari said. “Teachers have no way of knowing whether they will be affected; they are not financial experts, they are teachers.”

And more teachers could be affected in the coming years as, from 2014/15, the annual allowance is being cut by an additional £10,000 to just £40,000.

Martin Freedman, director of economic strategy and negotiations at the Association of Teachers and Lecturers union, said that the change in tax allowances had been scrutinised by the union four years ago, and he was surprised so many teachers had been hit by the change.

“We didn’t think they would be many people in the public sector would see a large enough increase in their pay for them to be affected,” he said. “I’m surprised that people working in schools are receiving this level of increase, which is making this a problem.”

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