Mr.
Timms: I am following the hon. Gentleman’s argument
with interest. I think that he is slightly overstating his case. Does
he accept that 98.5 per cent. of taxpayers will not be affected by the
changes at
all? 9.15
am
Mr.
Hoban: The Minister is getting into the numbers game that
the Treasury seems to like at the moment. I will come back to that
point a bit later. The Minister will say that the changes affect only
the highest earners, but I have some examples of how the rules work in
practice which show that they could affect people on relatively modest
incomes who may have received redundancy payments in the past or sold a
business. Such people will be affected by the changes. The Government
present the measure as a tax clampdown on the rich, but there are some
hard cases that will emerge from the crude way in which the Government
have introduced the anti-forestalling measures. We will discuss that in
more detail when we debate the amendments.
As I was
saying, there is concern that principles have been undermined. It is
worth reflecting on the Minister’s point that 98.5 per cent. of
people will not be affected by the changes. However, part of the
problem is that the measure sends a signal that will lead those people
to ask, “Well, how can I be sure what will happen in the
future?” What certainty can there be that the
Government’s proposal will not be extended further down the
income chain in the future? That is the problem that the Government
have because, although they believe that
the changes affect only a narrow group of people, the concern is what
will happen next. People will ask, “Do I really want to lock up
my money for the long term in pensions or is there an alternative form
of saving on which I can rely instead, in relation to which there will
be less chance of Government interference and changes to the tax
rules?” The measure will have a behavioural impact that spreads
beyond the narrow group that the Minister believes is affected by the
changes. The changes
are being made at a time when the pension system is not in great shape.
A large proportion of the population has not saved enough or does not
save at all. If the message that they receive from the press, the media
and the Chancellor is that the rules are up for debate or change, and
that nothing is certain, they will feel reluctant to lock their money
up for the long term. We cannot afford to apply any more disincentives
to saving. People’s confidence in the pension regime has been
shaken by the financial crisis. Even in these troubled times, many
people will see housing as a more reliable asset for investment and as
being something that they control. If long-term savings through
pensions are undermined, the chances are that more and more people will
spend money on housing and might not save at all. That will be to the
long-term detriment of not only themselves and their families but the
stability of the economy as a
whole. I
talked about the impact on behaviour in response to the
Minister’s comments. Trevor Matthews, chief executive office of
Friends Provident, has
said: “Tax
relief on contributions was a way of the Government saying to everyone
— and I mean everyone, irrespective of earnings — that
‘saving for your pension is a good thing and we will encourage
it.’ Now that contract has been broken — and if it can be
broken for one segment of savers now, it can be broken for
others.” So
it is not enough that the changes will be restricted to a narrow band
of earners. Unintended consequences could affect the culture of saving
in the UK. The National Association of Pension Funds has put forward an
argument that is difficult to accept, but that reflects reality. If the
managers and directors of business no longer have a stake in a pension
fund, how will that affect their view of that pension fund? Will they
continue to support an expensive defined benefit scheme, or will they
decide that they ought to reduce the financial risk to the company and
move to a defined contribution scheme? Will the changes accelerate the
shift away from DB to DC schemes? That is a difficult argument, but one
can see why people think that that will be the
case. The
Government say that the measure is about fairness, but it is actually
about how they will shore up their revenue projections from the 50p
rate. If this was about fairness, the Government would have come up
with a more imaginative scheme for how to use the £3.1 billion
that the measure will raise to shore up savings and pensions elsewhere
in the system. Instead, the additional revenue is going into the
Treasury’s coffers.
Although we
have not tabled amendments to this effect, there are alternative
proposals that work with the system, rather than introducing additional
complexity, that some in the industry felt could have been used to
restrict the tax relief claimed by top earners. The Government could
have decided to reduce the lifetime
allowance or the annual allowance. That would have restricted the
contributions made and gone with the grain of the existing A-day
regime. Because this is an income-based system, there will be hard
cases at the margin. Someone earning slightly less than £150,000
will enjoy full relief on their pension contributions, but someone
earning slightly more than £150,000 will not enjoy that same
relief. The Government need to demonstrate that they have thought
through the suggested alternatives. I have set
out the background to clause 71 and schedule 35. I shall say a few
words about the anti-forestalling measures to set the amendments in
context. The measures will apply to anyone earning more than
£150,000 who makes contributions between 22 April
2009—the date of the Budget—and 5 April 2011 that exceed
the contributions previously made on a quarterly or more regular basis.
The measures apply only to contributions of more than £20,000.
Any contributions that breach the restrictions will be taxed at 20 per
cent. Therefore, the Government’s anti-forestalling measure
works out the pattern of regular savings and takes it into account when
looking at the pension contributions. Where the contribution is
£20,000 more than the previous pattern of savings, the 20 per
cent. tax charge will be applied. At that level, it sounds like a
fairly clear and straightforward system, because it assumes that
people’s income and contribution pattern is fairly
settled. However,
there are people who the regime may catch who do not have a settled
pattern of income. They may have an atypically high income one year and
if it arises in the two years prior to the year in which pension
contributions are made, they will be caught by the regime. It will
particularly affect the self-employed and partners in accountancy and
law firms, who have variable incomes and contribution patterns. Those
receiving generous redundancy packages and using it to top up their
pension contributions may also be caught by the measure, as may people
who have sold a business and made a one-off
gain. It
is a crude anti-forestalling measure that does not necessarily take
account of how people run their lives and how their income flows from
year to year. Some will feel aggrieved by the way the rules have been
set out. Part of the problem is that there has been no consultation;
the measure was introduced in the Budget 2009. The Government
are consulting on the implementation of the rules from 2011 but, as
yet, there has been no regulatory impact assessment on how it will work
in practice. The Government need to make clear why this
anti-forestalling measure is the right way to proceed and why it will
not have the negative impact that many believe it will have on the
saving culture in the UK. Not only those directly affected but the
wider population will see, yet again, that the message from Government
is that one cannot rely on consistency, stability and predictability
when it comes to the taxation of
pensions. Mr.
Jeremy Browne (Taunton) (LD): I start by saying it is a
pleasure to serve under your chairmanship, Mr. Hood, but
also apologising for coming to the debate a couple of minutes after it
started. I extend my apology to the two previous speakers for missing
their opening remarks.
We are
familiar with this important subject matter. The context is a budget
deficit of £175 billion this year and, by the
Government’s estimate, £173 billion next
year. The amalgam of those deficits is more than the total Government
spending in the first Budget of the now Prime Minister back in 1997. We
are talking vast sums of money so the onus is on all of us to ensure
that the money is spent as efficiently and equitably as possible
because there is none spare to be used inefficiently. We also live in a
society with serious income inequalities. Therefore, as well as
ensuring that the money is spent as efficiently as possible, we have to
consider whether it has been spent as effectively as possible. Are the
people who benefit from the state’s largesse, through money that
they receive or money not taken from them—the effect may be the
same, but the approach somewhat different—the right people?
Could the money be better targeted to achieve either economic or social
objectives, or both? The reason why I give that context is my
party’s view that the current situation that we are
seeking to amend—though only in a modest
fashion— is unreasonable. Somebody who earns
£20,000 a year enjoys much less generous relief on their pension
contributions than somebody who earns £120,000 a
year. Mr.
Mark Field (Cities of London and Westminster) (Con): The
reality of the relief is based on the highest rate of tax paid. That is
why the relief is notionally less generous for someone earning
£20,000 than someone earning £120,000. It is the nature
of that system. The system is not intrinsically wrong; the relief
focuses on tax that is already paid. It is relief on tax being
paid.
Mr.
Browne: The rationale given is that people will pay that
level of tax, but they may not. Somebody may earn a higher level of
income, but when they reach retirement age not actually be eligible to
pay the top rate. There are difficult choices to make. Everybody in the
Committee has to ask themselves whether, if we were starting from
scratch, the best way we could think of to spend billions of extra
pounds was to give additional relief on pension contributions to the
richest people in the country. Or, as my party is proposing—I
will come to this, but not at great length as I do not wish to test
your patience, Mr. Hood—whether that money could be
spent more efficiently and effectively on people with lower incomes.
That is the sort of radical thinking that I would hope at least some of
the parties represented in the Committee would be willing to
consider. When
the Minister intervened on the hon. Member for Fareham, he said to the
Committee that the measures being put forward by the Government
affected only 1.5 per cent. of the population. What we have to remember
is that people who donate large amounts of money to political parties
and people who edit national newspapers are rather heavily represented
in that 1.5 per cent. of the population. I would not say for one moment
that that would in any way weigh upon our deliberations. I only observe
that that is the case. Everybody in the Committee would do well to
acknowledge that, rather than to pretend that there is not a degree of
realpolitik affecting our
considerations. 9.30
am Perhaps
I am showing my naivety as a representative of what is currently the
third party in British politics in thinking that we should be bending
over backwards to try to do more—
Mr.
Greg Hands (Hammersmith and Fulham) (Con): Fourth, I
think.
The
Chairman: I ask the hon. Gentleman not to respond to
sedentary interventions. I also ask hon. Members to allow him to speak
without
interruption.
Mr.
Browne: Thank you, Mr. Hood. I am too often
affected by my own modesty— [Laughter.] My
party, as I should remind the Committee, finished second in the
national vote share in the local elections earlier this month. But in
terms of the numbers of Members of Parliament in this House, we are
third.
I suppose
there is a reasonable case to be made that we are not sufficiently
considerate of the financial sensibilities of newspaper editors and
potential big donors to political parties when we make our
contributions to this Finance Bill Committee. A wiser way to order our
affairs would be to give greater incentives to people on low incomes to
work and have greater self-reliance; to allow them to keep a greater
proportion of their income and to finance that by ending pension relief
above the basic rate. That would be a better way to spend the money. It
would create a fairer society and at the same time a more economically
mobile and dynamic
society.
Mr.
Hoban: I am not sure from whom the hon. Gentleman has been
receiving representations. If he has had letters from national
newspaper editors or the few wealthy donors to his party, perhaps he
should tell us. The people who have contacted me about this have been
pension advisers, self-employed people and people who pay contributions
on an annual basis who are in mainstream businesses. A large number of
people who are affected by this have made their concerns known. He
should be careful about whose motives he
impugns.
Mr.
Browne: A lot of people are choosing to make
representations. I acknowledge that not all of them edit national
newspapers. But I would be surprised if the hon. Gentleman had had
large numbers of representations from people with incomes of
£10,000 or £12,000 a year saying that the Government
should continue to give relief on pension contributions to people
earning £200,000 a year as they would prefer that to raising the
starting threshold for income tax to £10,000 as proposed by the
Liberal Democrats. I would be more than happy to give way to him if he
wishes to read out some of those representations, but I suspect he has
not had any. What he has had is representations—they are
perfectly legitimate—from interested parties such as those who
run pension funds and obviously want to see the maximum incentive for
people to contribute to those pension funds, including high
earners.
I am trying
to step back and look at the scene as a whole. As I reminded the
Committee at the outset, we are running a massive public deficit. In
the United Kingdom people in the bottom decile pay a higher proportion
of their overall income in tax than those in the top decile. So we have
to ask whether we are spending money as effectively as we might by
giving very generous pension relief to relatively high earners and not
targeting those with much more modest
incomes.
I believe we
could do much more for people on low incomes to give them incentives to
work. The tax burden on them, especially when they lose some benefits
as they earn money, is quite often a disincentive to work. Lots of
people on low incomes are, for my tastes, overly reliant on the
largesse of the state. I should like them to feel a greater sense of
self-reliance and to feel that their work and their endeavours helped
them to get on in life. That would be a better use of this money than
giving pension relief at a higher rate. My party’s position is
that there should be some pension relief. We recognise that it is
valid, but we would restrict it to the basic
rate. The
Government have made a modest step in that direction, which I fear
shows only their timidity at this stage of their life. Nothing has been
done for many years, and we now have this slightly messy and slightly
complicated proposal that will, as the Minister acknowledges, reach a
modest number of people. It will limit the relief to people with
earnings of more than £180,000 a year. That could be seen as a
step in the right direction by someone who takes the view that I start
with, but the Government’s timidity is unlikely to win them many
friends or bring in enough money to make a substantial difference.
There is a feeling that this is a gesture, rather than an attempt to
recast the tax system
meaningfully. The
only other matter that I want to touch on at this stage is one on which
I agree with the hon. Member for Fareham, as I often do. The Government
should re-examine the idea that people have normal patterns of pension
contributions, because it seems to be based on a mindset that everyone
has a monthly income—a sort of pay-as-you-earn income. That is
often so, but may not be. People with different incomes and some who in
some years may not have any income, but in other years, quarters or
months earn a reasonable amount have contacted me saying that their
pension contributions are haphazard, and that they are not trying to
avoid taxation or behaving improperly, but that the nature of their
income is that the returns are not consistent over a year or a number
of
years.
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