Mr.
Jeremy Browne: I thought that the Minister was about to
come to an end. I just wanted to ask him one further question before he
sat down. Can he confirm that the Government’s projected
borrowing assumptions take into account the revenue that will accrue
from this measure in future years?
Mr.
Timms: Yes I can. As I have said, the measure is part of
the fiscal consolidation that is required. Also, I have now remembered
the answer to the hon. Gentleman’s earlier question. It is that
65 per cent. of tax relief on pensions goes to higher rate
taxpayers. We
recognise that for some people with less regular contribution
patterns—they have been mentioned in the debate already and we
will come back to discuss
them later—the £20,000 special annual allowance represents
a lower pension contribution than they have typically made in the last
few years. That is why, in my written statement to the House on Budget
day and in subsequent discussions with representative bodies, we have
made it clear that we welcome views on whether there are ways of
ensuring that those people with less regular contribution patterns can
be protected in the interim regime while continuing to meet our
objectives. In particular, it is important that the arrangements remain
effective against the risk that forestalling behaviour will
significantly increase the cost of pensions tax relief for the
wealthiest people. We are
continuing to talk to industry and gather information about those
people who are making non-regular contributions above £20,000 a
year, to inform our position. I can tell the Committee that we shall
return to this issue on Report if we conclude that action on it is
necessary.
There is a
regulation-making power here, so that we can, if required, make
provisions for other forms of regular pension contributions to be
protected. The anti-forestalling legislation also includes specific
provisions to prevent avoidance. The regulation-making power means that
we can react quickly if it becomes clear that people are taking
advantage of the regime, but the power to tighten the rules can be used
only prospectively, not retrospectively. There is also a power to amend
the rate of tax, which we will use to amend the rate of the special
annual allowance charge, following the implementation of the new 50 per
cent. rate from 2011. The power is subject to the affirmative
procedure, so the regulations will be available for debate in the
House.
10
am Coming
back to the suggestion that we are discouraging pension savings, I do
not think that that applies at all to people on modest incomes. Even
those on high incomes who are affected will still benefit from higher
rate tax relief on £20,000 of pension savings in a year, and
will receive basic rate tax relief on the rest, so there are still good
reasons for them to save in a pension. The hon. Member for Fareham read
out a couple of quotes, so let me read a few back to him from the
industry. David Millar of Friends Provident, one of the companies he
referred to, has
said: “Of
our...members...only a very small percentage will even be
touched by the change in
legislation”. John
Lawson of Standard Life has said
that “anyone
with taxable income of up to about
£180,000” in
a
year “will
still find pensions more tax-attractive than other
investments.” I
look forward to the debate that we are about to have on some of the
more detailed points, and I commend the clause to the
Committee. Question
put and agreed
to. Clause
71 accordingly ordered to stand part of the
Bill.
The
Chairman: I can tell the Committee that I have had
information from the Committee of Selection that the hon. Member for
Burnley (Kitty Ussher) has been discharged from the Committee and will
be replaced by the Exchequer Secretary to the Treasury, the hon. Member
for Portsmouth, North (Sarah McCarthy-Fry). That change will take
effect from this afternoon’s sitting.
Schedule
35Pensions:
special annual allowance
charge
Mr.
Hoban: I beg to move amendment 198, in
schedule 35, page 279, line 18, leave
out ‘£20,000’ and insert
‘£50,000’.
The
Chairman: With this it will be convenient to discuss the
following: amendment 199, in schedule 35,
page 279, line 24, leave out
‘£20,000’ and insert
‘£50,000’. Amendment
200, in
schedule 35, page 279, line 25, leave
out ‘£20,000’ and insert
‘£50,000’. Amendment
201, in
schedule 35, page 280, line 25, leave
out ‘£20,000’ and insert
‘£50,000’.
Mr.
Hoban: As the Minister said in the debate on clause 71,
setting to one side the issue of regular contributions, someone earning
more than £150,000 a year will get full tax relief on
contributions up to £20,000. The purpose of my amendments is to
probe the Government’s thinking about the level at which they
set that threshold. I argue that the threshold should be increased to
£50,000. As
I said in the previous debate, the A-day regime replaced a complex set
of rules, and was meant to simplify them and make it easier for people
to save in a more sensible way. One rule that was swept away was the
cap on pension contributions. Prior to the changes, people who were
under 50 could make pension contributions of 17.5 per cent. of their
net relevant earnings. On that basis, someone earning £150,000
could make contributions of up to £26,000. For people over 51,
the rate increased from 17.5 per cent. to 30 per cent., so that on an
income of £150,000 they could make a maximum contribution of
£45,000. The
Minister could have drawn inspiration from the pre A-day legislation to
come up with a cap as a proportion of salary when that income exceeds
£150,000 or a higher monetary cap to reflect those pre-existing
rules. The cap is an important issue, because it will particularly
affect those without the regular contribution pattern to which the
Minister referred. I know that we will talk about that in some length
in the debate on the group of amendments headed by amendment 228, but
it is important to point out that the measure creates a distortion in
the system, because if someone is earning £140,000 at the
moment, they could make a contribution of, for example, £90,000
and gain relief at 40 per cent. on that contribution. That would be a
generous relief, and is a consequence of how the measure is structured.
However, a person with an income of £150,000 without a regular
contributions record could be limited to receiving relief at the higher
rate on £20,000. A mismatch has arisen, as people earning below
the threshold will do quite nicely from the tax relief, but those above
the threshold without a regular pattern of contributions will be
limited to £20,000. One way in which the Government could deal
with regular contributions and the application of the measure to people
with an irregular contribution pattern, is to increase the annual
allowance to create a much more flexible regime for those earning more
than £150,000. With that in mind, I have tabled amendment 198
and the other amendments in the group.
Mr.
Timms: We set the special annual allowance at
£20,000, with very careful regard to typical levels of
contributions, to provide a reasonable balance for those affected while
retaining the overall aim, which is that the interim regime over a
couple years should be revenue neutral. The special annual allowance
introduced in the schedule strikes a balance between protecting tax
revenues and normal contribution patterns and minimising burdens on
pension providers. Individuals will receive relief at the marginal rate
up to the higher limit of their normal regular pension savings and the
special annual allowance of £20,000. Amendments 198 and 199
would increase the allowance from £20,000 to £50,000
across the board. They would significantly increase the generosity of
the regime and would not be well targeted. The cost of providing relief
to those on the very highest incomes would be increased, costing around
£750 million over the two
years.
Mr.
Hoban: I am interested by the Minister’s comment
about the cost of increasing the threshold from £20,000 to
£50,000 and the fact it is £750 million out of a
£2 billion estimate. There is a need for clarity
because, when looking at the cost, the Committee would be interested to
know what element of the revenue raised by the measure comes from
capping regular contributions and what element comes from the
£20,000 cap. We do not have any clarity on how the measure will
bite in
practice.
Mr.
Timms: The £750 million comes from the fact
that under the hon. Gentleman’s amendment, many people earning
£150,000 or more would be able to contribute substantially more
to their pensions over the next couple of years than they would have
expected. They will thereby benefit from full higher rate relief, which
will not be available from 2011. There are clearly some assumptions
there about how people will behave, but we are certainly talking about
a substantial increase in the cost of those arrangements if the cap was
lifted in that way. £20,000 has been set, so that the
arrangements are pretty much revenue neutral, and there will be a small
cost of £20 million over the two years from setting the cap at
that
level. Amendments
200 and 201 would alter the amount of someone’s pension
contribution that can be deducted in calculating whether their income
is above £150,000, raising it from £20,000 to
£50,000. That would be very expensive and open further
opportunities for avoidance. Were the amendments to be made, anyone
with gross income of up to £200,000 would be able to make
pension contributions of between £50,000 and £245,000,
because their taxable income would have been reduced to below
£150,000. Amending the definition of income as proposed would be
costly. Adopting a more generous definition of taxable income allowing
for £50,000 deductions in the form of contributions alongside a
special annual allowance of £50,000 would have a total cost for
both measures, we estimate, of £800 million. I do not see the
justification for increasing relief in that way for the best-off people
in the country by such a large
extent.
Mr.
Hoban: Does the Financial Secretary not accept my point
about the differential effect that that will have on people on either
side of the boundary line for income? Someone earning £140,000
could make a £90,000
contribution and receive 40 per cent. tax relief, but someone earning
more than £150,000 who has not had a regular pattern of
contributions would only receive relief at 40 per cent. on
£20,000 of contributions. There is a mismatch arising from the
way in which the £150,000 limit has been
introduced.
Mr.
Timms: I am not really sure that there is a mismatch,
because a person earning £140,000 will continue to be able to
enjoy full higher-rate relief from 2011 onwards. We are trying to
ensure that those who will be affected by the arrangement from 2011 are
not in a position to be able to forestall, and that is what the
arrangements effectively address. Given that explanation, I hope that
the hon. Gentleman will be able to withdraw those costly
amendments.
Mr.
Hoban: The point that emerges from the Financial
Secretary’s remarks is not so much the cost but the crude way in
which the measure will impact on people. Someone earning less than
£150,000 could potentially enjoy more tax relief than someone
earning £150,000 who does not have a regular pattern of
contributions. There is a clear dividing line—I hate to use the
phrase—between those just under the threshold and those just
over it, with regard to what they are able to claim in tax relief.
Someone who does not have a regular pattern of contributions will be
disadvantaged, but someone earning £150,000 with regular
contributions of £30,000 could enjoy the full relief. If they do
not have a regular pattern of contributions, full tax relief will be
limited to £20,000. A problem is emerging, partly as a
consequence of the treatment of regular
contributions.
Mr.
Jeremy Browne: Does the hon. Gentleman
accept that he is making a compelling argument for the case that I
made? If everyone enjoyed pension relief at the basic rate, there would
be no threshold and no anomaly. Not only would lots of extra revenue be
available to have a more economically efficient and socially just
country, but we would get rid of all the anomalies he is so concerned
about.
Mr.
Hoban: I am not sure that I am making a compelling
argument for the hon. Gentleman’s proposals, but then I did not
think that he made a compelling argument himself in the stand part
debate. However, I will let that one pass by. Some people, because of
the hard threshold of £150,000, will not enjoy the same pension
tax relief as people earning a slightly lower salary. That perhaps goes
back to the issue of a regular contribution pattern to which the
Financial Secretary has referred and which we might address later. My
amendment would soften the blow of regular contributions and the issues
surrounding them. It may not be the most effective way of doing so, but
it is a suggestion about how to tackle the matter. However, I am much
more interested in the Minister’s response to tackling this
issue in the context of amendment 228, so I beg leave to withdraw
amendment
198. Amendment,
by leave,
withdrawn.
Mr.
Hoban: I beg to move amendment 202, in
schedule 35, page 280, line 36, leave
out from ‘year’ to end of line
38.
The
Chairman: With this it will be convenient to discuss the
following: amendment 203, in schedule 35, page 280,
line 39, leave out sub-paragraph
(2). Amendment
204, in
schedule 35, page 291, line 7, at
end insert ‘but this Schedule shall not apply
where the individual concerned is aged 50 or over at some time in the
tax years 2009-10 and
2010-11.’.
Mr.
Hoban: The amendments deal with a different aspect of the
rules. Paragraph 2 of the schedule sets out how to calculate the
relevant income to determine how the 20 per cent. charge will be
levied. In essence, it is a very broadly based definition of income. In
paragraph 2(2), we learn that relevant income calculation
applies not only to the tax year in question but to the tax year before
that and the one before that. If someone was earning £30,000 a
year, but had had a temporary boost in their earnings two years ago
from, say, the sale of a business, he would be subject to the
restrictions in these measures. This provision, therefore, captures
people whom the Government might not necessarily want to
catch.
10.15
am Let
me give some other examples. A businessman might have sold his business
and had a one-off boost to income. We know that as a consequence of the
recession a number of people have been made redundant. Someone could
have been made redundant in 2008-09 and received a very generous
package which could well have taken him into the £150,000-plus
bracket. He may find another job in 2009-10 that pays £40,000,
but decides that because he is now in employment he will use some of
that redundancy package to top up his pension. He might make a
£40,000 contribution. Because he has earned more than
£150,000 in the past, there will be a restriction on the tax
relief he earns, even though he may now be a basic rate taxpayer. He
could have earned a bit more—say £60,000 or
£70,000—and be a higher rate taxpayer, receiving relief
at 40 per cent.
As a result
of a one-off change in his income a couple of years ago, that person
has to face a restriction on the tax relief that he will get from
topping up his pension fund. That is part of the pitfall that comes
from having a charge that is based on past earnings contributions
rather than something that looks forward. Again, this is where the
iniquity of the £150,000 limit comes in. Someone whose earnings
have fallen from £150,000 to £80,000 would lose tax
relief, whereas someone whose earnings were £149,000 and fell to
£80,000 would not, and that does not seem right. We must think
very carefully about whether the scope for manipulation of income and
pension contributions is sufficient to justify punishing those people
who would be entitled to relief now but will not benefit from it
because of a fluctuation in their income several years ago. Amendments
202 and 203 will address that issue by removing all references to
previous tax years so that a person is only judged on their income for
this tax year and not for their income in previous tax
years. Amendment
204 concerns the effects of these measures on people approaching
retirement. There is a tendency for people who are approaching
retirement to focus a bit more on their future pension provision, and
to think about making larger contributions. They have perhaps paid off
their mortgage and have some more spare
income. Their interests, and how they spend their money, might change,
and they might begin to focus more on their upcoming retirement. They
might therefore want to contribute more to their pension pot. They
might want to achieve a particular level of income, so the later they
start, the higher their contributions will have to be. The loss of the
higher rate relief might well restrict their ability to save adequately
for retirement. Furthermore, the sporadic nature of the income of
someone with a small business might make it difficult for them to save
earlier in their
lives. Amendment 204
would assist people approaching retirement by enabling them to top up
their pension pot more flexibly. It is a fairly crude amendment, and
doubtless the Minister will tell me just how much it will cost, but it
raises a legitimate concern that we need to bear in mind. If he accepts
my argument, perhaps we can return to it on Report to find other ways
of providing for more flexibility in the system to help people
approaching retirement who feel the need to top up their pension pots
by significant amounts. That could ensure that they have a decent
income on which to live and prevent their having to fall back on the
state.
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