Previous Section Home Page

Mr. Speaker : Order. The hon. Member for Govan must now leave the Chamber.

The hon. Member withdrew accordingly.

Column 293


Budget Statement

3.45 pm

Mr. Neil Kinnock (Islwyn) (by private notice) : To ask the Chancellor of the Exchequer, whether he will make a financial statement.

The Chancellor of the Exchequer (Mr. Nigel Lawson) : I am happy to respond to the right hon. Gentleman's question.


The background to this year's Budget is the unprecedented strength of the British economy, coupled with the continuing and overriding need to combat inflation, at a time when, throughout the world, it is unmistakably edging up again.

I shall begin with an account of the performance of the economy in 1988 and the prospects for 1989, set in the context of the past 10 years. I shall then deal with monetary policy and the public sector finances. Finally, I shall propose a number of measures to carry forward the process of tax reform.

As usual, the Financial Statement and Budget Report, together with a number of press releases filling out the details of my proposals, will be available from the Vote Office as soon as I have sat down.


The Government's first 10 years in office have seen a transformation both in the way in which economic policy is conducted, and in the results that have been achieved.

For the first time, economic policy has been set firmly and explicitly in a medium-term context. We have been guided by the basic philosophy that the Government should set a sound medium-term financial framework and leave the private sector free to operate with confidence within it.

The Government came to office with two central objectives--to defeat inflation, and to breathe new life into a moribund economy--and a clear idea of how to achieve those objectives. Inflation is a disease of money ; and monetary policy is the cure. The role of fiscal policy is to bring the public accounts into balance and to keep them there, and thus underpin the process of re-establishing sound money. Strong sustainable growth is achieved, not through any artificial stimulus, but by allowing markets to work again and restoring the enterprise culture ; by removing unnecessary restrictions and controls and rolling back the frontiers of the State ; by reforming trade union law and promoting all forms of capital ownership ; and by reforming and reducing taxation.

The first and most urgent task we faced was to damp down the inflationary fires that had raged in the 1970s, and wrought so much economic and social havoc ; and we succeeded. Between 1974 and 1979, inflation had averaged more than 15 per cent. Over the past six years it has averaged 5 per cent.- -still not good enough, but a massive improvement.

Once business and industry recognised the fundamental changes that were taking place, they responded to the new economic climate with vigour and confidence. As a result, we have experienced the longest period of strong and

Column 294

steady growth since the war. Output in the United Kingdom has grown faster than in all the other main European nations during the 1980s--a marked contrast to the previous two decades, when we were bottom of the league--and this growth has been based on a dramatic and sustained improvement in productivity.

For the economy as a whole, our productivity growth has been second only to that of Japan among all the major nations during the 1980s, and our productivity growth in manufacturing has exceeded even that of Japan.

In Britain today we have more people in work than ever before in our history ; they are better motivated than ever before, and their living standards have improved beyond recognition. But it is not just our economic performance that has been transformed : so have our prospects for the future.

Over the past seven years, investment has grown more than twice as fast as consumption, creating the increased capacity necessary to meet future demand. Total business investment is now a higher proportion of national income than ever before, and its quality has improved immeasurably, too ; as has the quality of British management. We have seen a dramatic and long overdue improvement in company profits and a remarkable growth in the total number of businesses, last year at the rate of more than 1,000 a week. Provided we stand firm in our resolve to get on top of inflation, the prospects before us are excellent. At least on this side of the House, we do stand firm.

A year ago, in the aftermath of the worldwide stock market crash, it looked as if there would be some slowing down from the rapid growth of 1987. In fact that was not to be.

As the House knows, the state of the national income statistics leaves much to be desired, but it now appears that we had in 1988 a second successive year of growth at 4.5 per cent., with unemployment falling by over half a million, to well below the European average. Manufacturing output grew particularly rapidly, by more than 7 per cent., to a level well above the previous peak.

But total spending also grew by getting on for 7 per cent., mainly because of the boom in industrial investment, in itself a welcome event, but also because of continued strong growth in consumer spending. This last was financed to an unprecedented degree by borrowing, overwhelmingly mortgage borrowing.

Invevitably, the rapid growth of total spending led to renewed inflationary pressure. To some extent this was diverted into a sharp rise in imports, and hence into the deficit on the current account of the balance of payments. The published figures put this at £14.5 billion in 1988, although, given the £15 billion positive balancing item--another name for errors and omissions--the true figure is almost certainly less than this. But whatever the true figure, it is undoubtedly large, and a sharp increase on the deficit recorded in 1987 after seven successive years of surplus. Given sound policies, however, it can readily be financed.

Moreover, unlike previous current account deficits we have known in this country, it reflects not excessive Government borrowing, but rather an upsurge of private investment unmatched by private savings, and this imbalance is something that will in due course correct itself.

The real threat is posed by the increase in inflation itself. Excluding the distorting effect of mortgage interest

Column 295

payments, the RPI rose by 4.5 per cent. last year, much the same as the average over the previous five years, but this underlying rate increased significantly through the year, and now stands at 5.5 per cent.

Moreover, the increase in inflation appears to be a worldwide trend. Taking the seven major industrial nations as a whole, inflation is now at its highest level for three and a half years. In the United Kingdom, as in a number of other countries, it became clear that it was necessary to tighten monetary policy sharply. That meant raising short-term interest rates, which I duly did, starting last June.

I am, of course, keenly conscious of the difficulties many borrowers, particularly home owners, are now experiencing. But however unwelcome high interest rates may be, they are infinitely preferable to the damage that would be done by high inflation. There are now increasing signs that the determined action that I have taken is having the desired effect. The housing boom that played such a large part in the events of last year has subsided. Monetary growth has slowed down appreciably, and retail sales, too, seem to have levelled off over the past four months, presaging a gradual recovery in the personal savings ratio.

The outlook for 1989 is for inflation to rise a little further over the next few months, from 7.5 per cent. including mortgage interest payments, to about 8 per cent., before falling back in the second half of the year to 5.5 per cent. in the fourth quarter and perhaps 4.5 per cent. in the second quarter of 1990.

Some slowdown in real growth is inevitable as we get inflation back on to a downward path--indeed, it has almost certainly already begun to happen. Overall growth is forecast to fall from the 4.5 per cent. recorded last year to 2.5 per cent. this year, with growth through the year at 2 per cent.

Domestic demand is forecast to slow down even more markedly. But within this, investment, which is holding up well, is once again forecast to grow faster than consumption. The current account deficit is forecast to remain at the same level as last year.

But the question of just how "soft" or "hard" the so-called landing will be is not in the hands of Government alone. The Government's task is to reduce inflation by acting, through monetary policy, to bring down the growth of national income in money terms. The task of business and industry is to control their pay and other costs. The more successfully they do so, the less costly in terms of output and employment the necessary adjustment will be.

Over the medium term, however, it is clear from our experience over the past 10 years that the policy we are pursuing will bring inflation down, and steady growth will resume. The best contribution the Government can make to this is to carry forward the process of supply side reform, to help make the economy work better. That is the objective of the specific measures to which I shall turn in the second part of my statement.

Column 296


As I said at the outset, monetary policy plays, and must always play, the central role in the battle against inflation. It is at the very heart of the medium-term financial strategy, the 10th edition of which I am publishing today.

I have described the monetary tightening that has taken place over the past nine months. This has already led to a sharp fall in the rate of growth of the target aggregate, narrow money, or M0. For 1989-90, the target range for M0 will be 1 to 5 per cent., as envisaged in last year's MTFS. Although it will start the year above the top of that range, its very low growth over the past six months--below 3 per cent. at an annualised rate--suggests that it will fairly soon come back within the range. As in the past two years, there is no target for the growth of broad money, or liquidity, but I will continue to take it into account in assessing monetary conditions.

The exchange rate is of particular importance in the conduct of monetary policy. The Government's clear commitment not to accommodate increases in domestic costs by exchange rate depreciation remains a key safeguard against inflation. In this context, we will continue to work with our G7 partners to maintain the greater exchange rate stability that has been a feature of the past two years.

Short-term interest rates remain the essential instrument of monetary policy. I repeat now what I have stated clearly on a number of previous occasions : interest rates will stay as high as is needed for as long as is needed, for there will be no letting up in our determination to get on top of inflation.

PUBLIC SECTOR FINANCES I now turn to fiscal policy. When we first took office, the public sector borrowing requirement was over 5 per cent. of GDP--equivalent to £25 billion in today's terms. This we steadily reduced over the years as a deliberate act of policy, until, by 1987-88, the PSBR had been eliminated altogether, and we started to repay the public debt.

Accordingly, last year I budgeted for a further public sector debt repayment, or PSDR, of some £3 billion. In the event, it looks like turning out between four and five times as large, at £14 billion, or 3 per cent. of GDP.

Even if there had been no privatisation proceeds at all, the public finances would still be in surplus, to the tune of some £7 billion. Nothing like this has ever been achieved in the past 40 years. Indeed, Government debt as a proportion of GDP is now lower than at any time since the first world war, and no other major country enjoys a comparable budget surplus. It has not been easy, even though we have been assisted this year by the exceptional buoyancy of the economy, which both boosted tax receipts and reduced public expenditure. Moreover, the substantial net repayment of public debt over the past two years has permanently reduced the burden of debt servicing, both now and for future generations. For the coming year, for example, the debt repayments of the last two years mean that net debt interest costs will be lower by over £1.5 billion a year. This saving is being put to good use, allowing extra spending on departmental programmes within our overall public expenditure constraints.

Column 297

The dramatic improvement in the United Kingdom's public finances has also provided a welcome opportunity to devote more attention to the structure of the debt that remains. We will continue to seek both to minimise the cost of servicing the Government's domestic debt and to improve its quality by relying less on the more liquid borrowing instruments.

We have also been able to restructure part of the Government's foreign currency debt, launching an innovative and cost-effective programme of Treasury bills denominated and payable in ECU. The first series of six- monthly tenders for these bills has proved a highly successful innovation. We plan to continue the programme at around the current level.

Meanwhile, I am today adding one more entry to the long list of financial controls which we have swept away during our term of office. The last surviving relic of the post-war apparatus for the direction of capital by the state is the Control of Borrowing Order, which, since 1946, has involved, first, the Treasury and, then, the Bank of England in giving consents for equity and bond issues in the capital markets.

As from today, it will no longer be necessary for companies wishing to make capital market issues to obtain the Bank of England's consent to the timing of such issues. The new issue queue will be a thing of the past. As soon as practicable, we will revoke the order itself and repeal the 1946 Act from which it stems.

The sterling capital market has in recent times been going through a period of considerable adjustment, as the Government have changed from being a large issuer to a large purchaser of their own debt. The abolition of the Control of Borrowing Order will remove an unnecessary and bureaucratic restriction on issuers of capital as they move into the space formerly occupied by the Government when they were a borrower.

This new freedom will be enhanced by a further, important set of deregulatory measures for the sterling capital market which are being promulgated today in notices issued by the Bank of England. These measures will open up the market for sterling paper of less than five years' maturity by extending the range of institutions which can make such issues ; and they will create a unified regime for all these issues.

Taken together, the changes I have described constitute a major liberalisation of the arrangements for London's capital markets. They will give greater flexibility to issuers and wider choice to investors.

In last year's Budget speech, I set out the principle of a balanced budget as the proper objective of fiscal policy, in these terms : "A balanced Budget is a valuable discipline for the medium term. It represents security for the present and an investment for the future. Having achieved it, I intend to stick to it. In other words, henceforth a zero PSBR will be the norm. This provides a clear and simple rule, with a good historical pedigree".--[ Official Report, 15 March 1988 ; Vol. 129, c. 996.]

It is a rule that ensures that, as national income continues to rise, the ratio of public debt to national income continues to fall, and with it the burden of debt interest. It ensures, too, that the state makes no claim either on the savings of the private sector or on flows of finance from overseas.

To go further than this, and seek to achieve the maximum possible repayment of public debt, would not be consistent with the Government's policy, as it would mean

Column 298

deferring for a very long time the benefits of a reduction in the burden of taxation, so I reaffirm the principle of the balanced Budget. However, given the substantial surplus we now have, the path of prudence and caution must be to return to balance not overnight, but gradually, over a period of years. Thus, we can expect further years of debt repayment ahead of us.

Moreover, given the particular uncertainties there are at the present time, I believe it would be right to budget for 1989-90 for a surplus similar to that secured in the year now ending ; in other words, a further public sector debt repayment, or PSDR, of some £14 billion.

This means that, in the space of three years, we shall have repaid roughly a sixth of the public debt that has accumulated over more than two centuries, but it also means that it will not be possible in this year's Budget to reduce the burden of taxation ; that is to say, to reduce taxation as a share of national income.


Before I turn to my proposals for changes in taxation, I have one other change of a specific nature to announce.

As the House knows, the new official secrets legislation currently passing through Parliament is very much narrower in scope than the present Official Secrets Act. In particular, it does not cover information in the possession of either the Inland Revenue or Customs and Excise concerning the private affairs of specific taxpayers. I am sure that the whole House will agree that it is essential for taxpayer confidentiality to be properly protected.

I therefore propose to introduce provisions in this year's Finance Bill to ensure that it will continue to be a criminal offence for officials or former officials of either of the Revenue Departments to reveal information about the private affairs of a specific taxpayer. I would only add that the need for this protection is in no sense a reflection on the probity and integrity of the members of those two Departments.

Indeed, after nearly six years as Chancellor and more than eight years as a Treasury Minister, I would like to take this opportuntiy to pay public tribute to the outstanding service I have consistently received from the officials of both Departments.

Mr. Eric S. Heffer (Liverpool, Walton) : Will the right hon. Gentleman give way?


Mr. Lawson : I now turn to taxation. As I have done on a number of previous occasions, I propose to divide this into three broad sections : the taxation of business, the taxation of savings, and the taxation of personal income and spending.

First, taxes on business. Ever since the corporation tax reform I introduced in 1984, the rate of corporation tax for small companies, defined for this purpose as those with annual profits of less than £100,000, has been set at the basic rate of income tax, currently 25 per cent.

Large companies, defined as those with profits of £500,000 or more, pay the main rate of corporation tax of 35 per cent., one of the lowest rates of tax on company profits in the world. Between £100,000 and £500,000, the averge rate of tax gradually rises from 25 to 35 per cent.

Column 299

I propose to keep the small companies rate in line with the basic rate of income tax for 1989-90 and to leave the main corporation tax rate unchanged, but I propose to increase the small companies' rate band substantially, by 50 per cent.

Thus, the small companies' rate will apply to companies with profits of less than £150,000, and the 35 per cent. rate will be reached only at profits of £750,000. These changes will reduce the corporation tax burden for more than half of all those companies that do not already enjoy the benefit of the small companies rate. I propose to increase the VAT threshold to £23,600, the maximum permitted under European Community law.

I also have to set the scales for the private use of company cars. This remains far and away the most widespread benefit in kind. When I doubled the car scales in last year's Budget, I made it clear that this still left this benefit significantly undertaxed. Accordingly, I propose to increase the car scales by one third for 1989-90. The yield from this will be £160 million in 1989-90 and £200 million in 1990-91. There will be no change in the fuel scales.

Over the years, I have received a number of representations from business complaining about the long-standing tax treatment of foreign exchange gains and losses. I recognise that, as business becomes more global, this subject becomes increasingly important. However, I have to say that I find it one of the most intractable I have encountered. Certainly, there can be no question of any change in the present system until a number of crucial and complex issues have been satisfactorily resolved. I have therefore authorised the Inland Revenue to publish today a consultative document which explores those issues and examines the scope for reform.

Finally, on business taxation, I have two major simplifications to propose, both of which follow from the income tax reforms that I introduced in last year's Budget.

One of the many undesirable features of an income tax system with several higher rates was that, since a taxpayer's marginal rate could well be very different in different years, the question of which year income related to made a great deal of difference. This was true of schedule E, where the strict rule is that income is taxed in the year to which it relates, on an accruals basis.

For the vast majority of employees, this basis of assessment for schedule E poses no problem, but for about half a million people, mainly directors, who do not receive all their income in the year to which it relates, it causes complications and often needless assessments and correspondence long after the tax year is over. It is also open to manipulation.

I therefore propose that income tax under schedule E should in future be assessed on a receipts basis, with the simple principle that one pays the tax when one receives the income. This will have a transitional cost of £80 million in 1989-90 and £60 million in 1990-91, but in the long term it will yield both extra revenue and a significant saving in both taxpayers' time and Inland Revenue staff. The reduction in the top rate of income tax to 40 per cent. in last year's Budget also enables me to make a major simplification of the tax regime for the vast bulk of the incorporated sector of small businesses : those known as close companies-- generally speaking, unquoted companies that are controlled by five or fewer people.

Column 300

The rules for the so-called apportionment of close companies' income are notoriously complex, taking up some twenty pages of impenetrable legislation. These rules are no longer needed, and I propose to abolish them. I believe that family businesses in particular will welcome this substantial simplification.

I do, however, have to guard against the avoidance of tax on investment income by channelling it through a closely controlled investment company. Any such company which does not distribute the bulk of its profits and other investment income will therefore be taxed at 40 per cent., equivalent to the higher rate of income tax.


I now turn to the taxation of saving.

The sharp decline in the ratio of personal saving to personal income, over the past two years in particular, has led to even more discussion than usual of the merits of providing greater tax incentives for personal saving.

Certainly it is desirable that, over the medium term, we generate as a nation a level of saving sufficient to finance a high level of investment, but what matters for that is not personal saving alone, but corporate saving too, which is running at a historically high level, and public sector saving, which has been boosted by the move to budget surplus.

Moreover, the personal saving ratio is measured in terms of gross saving net of borrowing, and it has fallen not because of a decline in gross saving but as a result of the sharp increase in personal borrowing. The appropriate remedy for that is to raise the cost of borrowing, and with it the return on savings, as we have done. Above all, the role of tax reform is to encourage enterprise and improve economic performance in the medium term. It is wholly inappropriate as a response to short-term or cyclical phenomena. So for the taxation of savings, the Government's policy is clear : it is to strengthen and deepen popular capitalism in Britain, by encouraging, in particular, wider share ownership. I have a number of specific tax measures to announce today to that end.

Personal equity plans, or PEPs, were first announced in my 1986 Budget, and started up in January 1987. As the House knows, those who invest in these plans pay no further tax at all, either on the dividends they receive or on any capital gains they may make--indeed, there is no need for them to get involved with the Inland Revenue at all.

Personal equity plans got off to a good start, with over a quarter of a million investors, many of whom had never owned shares before, subscribing almost £500 million between them in 1987.

Since then, however, the take-up of new PEPs has slowed down, not least as a result of the changed climate in the equity market which followed the October 1987 stock exchange crash. So the time has come to improve and simplify PEPs and give them a new boost.

First, I propose to raise the annual limit on the overall amount that can be invested in a PEP from £3,000 to £4,800. Secondly, within that, I propose to raise substantially the amount that can be invested in unit trusts or investment trusts. For many small savers, these provide an excellent introduction to shareholding.

At present, PEP investors are limited to £540 a year, or a quarter of their PEP, whichever is the greater, in unit or investment trusts. I propose to increase this limit very

Column 301

substantially, to £2,400 a year ; and the whole of a PEP will be able to be invested in unit or investment trusts, up to this limit. To qualify for tax relief, the unit or investment trusts will be required to invest wholly or mainly in United Kingdom equities. Thirdly, at present, only cash may be paid into a PEP. I propose that investors should also be permitted to place directly into a PEP shares obtained by subscribing to new equity issues, including privatisation issues.

Finally, I propose to make a number of important simplifications to the PEP rules so as to make the scheme more flexible, better directed to the needs of small and new investors, and, above all, cheaper to administer.

I am confident that the changes that I have announced today will enable personal equity plans to play an important part in stimulating the spread of ownership of British equities in the years ahead. I also have a number of improvements to announce specifically designed to encourage employee share ownership.

It is a striking fact that the number of approved all-employee share schemes has risen from a mere 30 in 1979 to almost 1,600 today, benefiting some 1.75 million employees. At present, the annual limits on the value of shares which can be given under all-employee profit-sharing schemes are £1,250 or 10 per cent. of salary up to a ceiling of £5,000. I propose to raise these cash limits to £2,000 and £6,000 respectively.

Secondly, I propose to increase the monthly limit on contributions to all- employee save-as-you-earn share option schemes from £100 to £150, and at the same time double the maximum discount from market value at which options may be granted from 10 per cent. to 20 per cent.

Thirdly, a number of my hon. Friends have been concerned that current tax law may be inhibiting the development of employee share ownership plans, otherwise known as ESOPs. These are distinguished from ordinary approved employee share schemes by the fact that they use a wider variety of finance, acquire more shares and tend to operate on a longer time scale.

I propose to make it clear that companies' contributions to ESOPs qualify for corporation tax relief, provided only that they meet certain requirements designed to ensure that the employees acquire direct ownership of the shares within a reasonable time. I hope that this will encourage more British companies, particularly in the unquoted sector, to consider setting up ESOPs.

Those firms with employee share ownership schemes have no doubt that giving the work force a direct personal interest in their profitability and success improves the company's performance. The same benefits flow from profit-related pay. That was one of the reasons why, in my 1987 Budget, I introduced a tax relief to encourage its development. I have some improvements to make to this scheme, too.

First, as I have previously announced, I propose to abolish the restriction that, to qualify for the tax relief, prospective profit-related pay must equal at least 5 per cent. of total pay. Secondly, I propose to raise the limit on the annual amount of profit-related pay which can attract relief from £3,000 to £4,000. Thirdly, I propose to enable employers to set up schemes for headquarters and other central units using the profits of the whole company or group for their profit calculations. Fourthly, to help share schemes and ESOPs

Column 302

as well as profit-related pay, I propose to change the so-called material interest rules which may at present unnecessarily exclude employees from schemes where they can already benefit from a trust set up for employees.

Taken together, the package of measures I have announced to encourage wider share ownership in general, and employee share ownership in particular, will help to ensure that the idea of a share-owning democracy becomes ever more entrenched as a part of the British way of life.

I now turn to life assurance. Last June, the Inland Revenue issued with my authority a major consultative document on the taxation of life assurance. The tax regime for life assurance is unique. The present system dates back to the first world war and has developed over the years in a piecemeal way, leading to a state of affairs in which the incidence of tax is extremely uneven, with some life offices paying no tax at all.

There is clearly a powerful case for reform, with a view to securing a tax regime which is more equitable both within the industry and as between life assurance and most other forms of savings.

I have considered very carefully the representations that the industry has made, and taken full account both of the changes to the regulation of life assurance proposed by the Securities and Investment Board under the Financial Services Act 1986 and the prospects for increased competition within the European Community after 1992. In the light of these factors, I have decided not to proceed with the more radical reforms canvassed in the consultative document, but I do have number of important changes to propose, based for the most part on the general tax reform principle of seeking lower rates on a broader base.

First, many life offices write pension business as well as life assurance, and they are not required to keep the two businesses entirely separate for tax purposes. This enables them to set the unrelieved expenses of the pensions business against the income and gains of their life business, thus giving their life profits unduly favourable tax treatment. The life offices themselves have accepted that this treatment is anomalous, and I propose to end it. This change will come into force on 1 January 1990. Together with some related measures to put the taxation of life offices' pension business on to a proper footing, it will yield some £150 million in 1990-91.

The remainder of the changes that I have to propose constitute a broadly balanced package which, because of the transitional provisions, will reduce the taxation of life assurance in 1990-91 by some £100 million.

I propose that the expenses incurred by life offices in attracting new business should continue to be fully deductable for tax purposes from the income and gains of life funds, but should in future be spread over a period of seven years. To give the industry time to adjust, this change will be phased in gradually over the next four years, starting on 1 January, 1990.

There are certain other, more technical, matters raised in the consultative document which will require further discussion with the industry, and any legislative changes on these issues will have to wait for next year's Finance Bill. But I can say here and now that I propose, as from 1 January 1990, to abolish life assurance policy duty. I also propose, from the same date, that the rate of tax payable on the policyholders' share of the income and gains of life offices, which at present stands at 35 per cent. on

Column 303

unfranked investment income and 30 per cent. on realised capital gains, should be reduced to the basic rate of income tax. The net effect of all these changes to the taxation of life assurance will be a cost of £20 million in 1989-90 and a yield of £45 million in 1990-91, rising somewhat in subsequent years. But above all, it will provide a more efficient and equitable tax regime for this most important industry.

Later this year, United Kingdom unit trusts will be able to compete freely in Europe and will face competition from analogous Community investment schemes here. At present, trusts investing in gilt-edged securities or other bonds face a tax disadvantage. They pay corporation tax at 35 per cent. on their income but can pass on a credit of only the basic rate of income tax to their investors. I therefore propose that from 1 January 1990, as for life assurance companies, the corporation tax rate on unit trusts that come within the new European Community rules will be equal to the basic rate of income tax. Their investors will then get full credit for all the United Kingdom tax the trusts pay.

I turn now to pensions. The tax treatment accorded to occupational pension schemes is particularly favourable ; and the extent of this privilege has to be circumscribed by Inland Revenue rules. Thus, pension, schemes qualify for tax relief only if they meet certain conditions, notably that the pension paid may not exceed two thirds of final salary : and if they fall foul of any of these rules, they lose all relief.

This has the perverse result that tax law effectively constrains the overall pension an employer can pay his employee. This is neither desirable nor necessary. Accordingly, I propose to make it possible for employers to provide whatever pensions package they believe necessary to recruit and reward their employees.

However, while it is clearly right that employers should be free to provide whatever pension they see fit, it would not be right to make the present generous tax treatment open-ended. I therefore propose to set a limit on the pensions which may be paid from tax-approved occupational schemes, based on a final salary of £60,000 a year. I have deliberately set the ceiling at a level which will leave the vast majority of employees unaffected, and it will be subject to annual uprating in line with inflation. It will still be possible for a tax-approved occupational scheme to pay a pension of as much as £40,000 a year, of which up to £90,000 may be commuted for a tax-free lump sum.

The new ceiling will apply only to pension schemes set up on or after today, or to new members joining existing schemes after 1 June. Public sector schemes, too, will be amended to comply with this. As I have already said, there will now be complete freedom to provide benefits above the Inland Revenue limits, though without the tax relief.

The introduction of this ceiling on tax relief also enables me to simplify and improve the rules for the majority of pension scheme members, in partcular to ease the conditions under which people can take early retirement.

I also propose to simplify very substantially the rules concerning additional voluntary contributions to pension schemes, or AVCs. In particular, the present requirements for free-standing AVCs place a heavy administrative burden on employers. These requirements will be greatly reduced. Indeed, in many cases employers will not need to be involved at all.

Next Section

  Home Page