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Session 2008 - 09 Publications on the internet General Committee Debates Finance Bill |
Finance Bill |
The Committee consisted of the following Members:Liam
Laurence Smyth, Committee
Clerk † attended the
Committee Public Bill CommitteeThursday 18 June 2009(Morning)[Mr. Jim Hood in the Chair]Finance Bill(Except Clauses 7, 8, 9, 11, 14, 16, 20 and 92)9
am
The
Financial Secretary to the Treasury (Mr. Stephen
Timms): I bid you a warm welcome to the Chair,
Mr. Hood, on this beautiful morning. I have a couple of
points to make. First, I would like to correct a misleading impression
that I gave the Committee at the end of our previous sitting during the
debate on clause 70 relating to the costing of the £45 million
expected to be yielded as a result of that clause, which dealt with
accommodation costs. I said, correctly, that the costing was based
on 47 cases of those arrangements being used by 19 employee
benefits trusts to gain a tax advantage, but it was not based on 47
individuals, because each case involved a number of different
individuals. Due to the way in which information about trusts using
lease premiums has been corrected, the number of employees benefiting
is not recorded, but it is certainly a good deal more than 47,
which helps to explain the large yield score for that
measure. Secondly,
as the Committee will be aware, my hon. Friend the Member for Burnley
has stepped down from her role at the Treasury, and I would like to say
how much we will miss her. We had already been working with gusto on
the Bill in the short time she was back at the Treasury as a Minister.
We of course look forward to welcoming my hon. Friend the Member for
Portsmouth, North (Sarah McCarthy-Fry), when she joins us later and
congratulate her on her appointment. I think that the Committee will
understand what I mean when I say that I am sure she would have wished
her appointment to have been in circumstances other than those we find
ourselves in today. I express my thanks to my hon. Friend the Member
for Burnley for her help over the past
week.
Clause 71Special
annual allowance charge
etc Question
proposed, That the clause stand part of the
Bill. Mr.
Mark Hoban (Fareham) (Con): I, too, welcome you to the
Chair, Mr. Hood. I will take this opportunity to echo the
Financial Secretary’s remarks about his colleague, the hon.
Member for Burnley. I know that she relished her return to the
Treasury, and we are all sorry that she has had to step down. I am
looking
forward to the hon. Member for Portsmouth, North, who is my neighbour,
joining the Treasury team, and I might say a little more when she
appears at our next sitting. I have grown used to seeing stories in our
local paper about the Department for Children, Schools and Families
being rebadged under her name, and I am looking forward to reading
articles in the local news about her welcoming the appointment of a new
member of the Monetary Policy Committee or discussing the level of
reserves held by the Bank of England in foreign currencies.
I want to
take the debate on the clause as an opportunity to set out some of the
background to the changes we will discuss in more detail when we come
to schedule 35 and to lay the trail that might put in context the
amendments we have tabled to that schedule. When the Committee’s
proceedings started four weeks ago, I said on a point of order that it
was the fourth Finance Bill Committee on which I have sat as a Front
Bencher, but it also happens to be the fourth Finance Bill in which the
A-day rules, which were established in the Finance Act 2004, have been
unpicked. We have seen changes twice to alternative secured pensions,
the removal of residential and other property from self-invested
pension plans, rules restricting recycling of cash lump sums and the
abolition of pension term assurance. That set of proposals on A-day had
been hard fought for, and it has caused a great deal of concern in the
industry that so many changes have been made. Of course, the changes
being made in schedule 35 are a precursor to wider changes planned for
2011-12. The
problem arises in the following way: there is logic behind some of the
individual measures and some of the changes may be justified, but they
send a message to potential savers that they cannot rely on a pensions
tax regime being in place for the long term. Indeed, during the 2004
Finance Bill debate, my hon. Friend the Member for Tatton
(Mr. Osborne) voiced concerns about the inclusion of
residential property in SIPPs. We encourage people to save for the long
term for their pensions through the personal accounts, which will be
introduced in 2012, but people have no certainty about the tax
treatment of their contributions or about how future contributions will
be dealt with. That is a disincentive; why would people want to lock up
their money for the long term if they are not entirely sure how the
Government will tax current and future
contributions? The
genesis of the anti-forestalling measures was the Government’s
announcement in the pre-Budget report 2008 of the 40p tax rate from
2011-12. One of the concerns about the tax’s revenue yield
expressed at the time was that people would use the generous reliefs
available for pensions to off-set their increased tax bill. That point
was widely flagged and the provisions under discussion, as well as the
other changes announced in Budget 2009 about pension contributions, are
a good example of “be careful what you wish for”, because
the concerns have now been picked up by the Treasury and translated
into the provisions under
discussion. It
is worth noting the current position on the taxation of pensions before
turning to the precise details involved. An individual who contributes
to an approved pension scheme obtains tax relief at the marginal rate
on their contributions, so Members throughout the House currently gain
tax relief at 40 per cent. on the contributions that they make to
Parliament’s occupational scheme. That
has been a feature of pension taxation for some time. As part of the
A-day regime, there was a shift from what was quite a restrictive
maximum contribution of 17.5 per cent. of net relevant earnings for
most taxpayers to a recognition that people may contribute to pension
schemes in a much more lumpy and less predictable way given the
changing nature of employment. The Government therefore introduced a
lifetime limit and an annual allowance. The lifetime limit of
contributions currently stands at £1.75 million and the annual
allowance is the lower amount of either earned income or
£245,000. The
Bill offers an additional layer of complexity, because the clarity set
out in the A-day rules is now going to be replaced by a second test
relating to people who earn more than £150,000. Their
contributions will receive a reduced tax relief of 20 per cent.
depending on—we will come back to this on a later group
of amendments—the previous pattern of pension contributions,
which is not a straightforward issue. The contributions made by
individuals to their pension funds are not the only ones affected;
employer pension contributions are also affected, and contributions
based on relevant income will lose their exempt status and be
classified as a taxable
benefit. A
defined-contribution scheme is straightforward as it is easy to define
an employer’s contribution. However, it is more difficult to
assess the value of an employer’s contribution to a
defined-benefit scheme of the nature that we in the House are fortunate
enough to enjoy. The Treasury has set up a working party with the
industry to work out how to value the contributions that businesses
make, because, quite often, a global contribution, rather than an
amount per individual, is made to such schemes. Then we get into the
issue of how we apportion it and how we value the impact of the
increase in
contributions. People
may think that they can wait until 2011 to plan their futures so that
they can see what happens with the scheme that the Government intend to
introduce. However, the Government are concerned about people taking
advantage of the gap between now and 2011, so have introduced the
anti-forestalling measures in schedule 35 which cover the tax periods
between now and the introduction of the new
regime. In
the number of representations that hon. Members from all parts of the
House have received, there have been some recurrent themes. Concerns
have been expressed not only by individuals who have written to us
about the particular impact on their circumstances, but by the pensions
sector. Some comments have been made about the feasibility of the
anti-forestalling
measures. Let
me turn now to the concerns about how the changes may affect savings,
particularly the issue around complexity leading to discouragement. The
A-day regime was a very serious piece of work, which involved
compromises on the part of both HMRC and the pensions industry to sweep
away the eight different tax regimes that then existed for pensions, to
move to a much more simple and straightforward system that people could
understand. It was hoped that the regime would lead to more people
increasing their contributions. However, now they see the
anti-forestalling measures, and they know about the changes that are
coming in 2011. We have a situation in which there are more complex
rules in place. As part of the anti-forestalling measures, which run to
some 18 pages, we have the prospect of future regulations. Clearly,
there are issues
around the valuation of employers’ contributions. The complexity
of the changes could act as a further disincentive to invest in
pensions. Tim Breedon, the chief executive officer of Legal &
General,
said: “The
planned cut to tax relief on pension contributions made by higher rate
taxpayers would deter saving and would also erode recent efforts to
simplify the system. To make savings attractive to people you want
simplicity not complexity. And you want stability, not
change.” Nick
Prettlejohn, CEO of Prudential UK businesses,
said: “The
proposed changes announced in the Budget will reintroduce complexity
and further confusion to the pensions landscape and erode consumer
confidence.”
Rachel Vahey, head of
pensions at Aegon—it was the head of Aegon, Otto Thoreson, who
led the Government’s review of financial advice to encourage
people to save more for their
future—said: “This
undermines the A-day agreement which was designed to promote long-term
pension saving, using the standard Lifetime Allowance to prevent abuse
of the system by the rich. That major overhaul of the pensions tax rule
was meant to last 30 years rather than three years. Pensions are for
the long term so consistency is essential to give people confidence to
plan for the
future.” As
ever, the issue is not just the proposals themselves but the way in
which they are introduced. The proposals were sprung on the industry.
In the days before the Budget, one or two people suspected that there
might be some cap on the higher rate tax relief, but they did not
expect to see changes of such a
nature. The
Government have broken a hard-earned concordat with the industry on the
A-day regime. They have moved away from the concept that underpins
those reforms of EET: exempt contributions; exempt investment income
and taxable benefits).
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