The
Committee consisted of the following
Members:
Bailey,
Mr. Adrian
(West Bromwich, West)
(Lab/Co-op)
Baldry,
Tony
(Banbury) (Con)
Blunkett,
Mr. David
(Sheffield, Brightside)
(Lab)
Borrow,
Mr. David S.
(South Ribble)
(Lab)
Browne,
Mr. Jeremy
(Taunton)
(LD)
Cable,
Dr. Vincent
(Twickenham)
(LD)
Duddridge,
James
(Rochford and Southend, East)
(Con)
Hoban,
Mr. Mark
(Fareham)
(Con)
Hogg,
Mr. Douglas
(Sleaford and North Hykeham)
(Con)
Kennedy,
Jane
(Liverpool, Wavertree)
(Lab)
McCarthy-Fry,
Sarah
(Exchequer Secretary to the
Treasury)
Mates,
Mr. Michael
(East Hampshire)
(Con)
Meacher,
Mr. Michael
(Oldham, West and Royton)
(Lab)
Mudie,
Mr. George
(Leeds, East)
(Lab)
Simpson,
Alan
(Nottingham, South)
(Lab)
Stewart,
Ian
(Eccles) (Lab)
Ben
Williams, Committee Clerk
attended the Committee
Eighth
Delegated Legislation
Committee
Wednesday
24 February
2010
[Joan
Walley in the
Chair]
Draft
Special Annual Allowance Charge (Variation of Rate) Order
2010
2.30
pm
The
Exchequer Secretary to the Treasury (Sarah McCarthy-Fry):
I beg to
move,
That
the Committee has considered the draft Special Annual Allowance Charge
(Variation of Rate) Order
2010.
I
would just like to say how pleased I am to serve under your
chairmanship, Ms
Walley.
This
order makes a small technical change to the rate of income tax charge,
known as the special annual allowance charge. Its aim is simply to
ensure that individuals continue to get the correct amount of tax
relief to which they are entitled, once the new 50 per cent. rate of
income tax comes into force.
The special
annual allowance charge arises on certain pension contributions made on
or after 22 April 2009 and is payable by some individuals with high
incomes. In the 2009 Budget the Chancellor announced that from April
2011, tax relief on pension contributions would be restricted for those
with incomes of £150,000 and more. The restriction addresses the
disproportionate levels of relief going to individuals on incomes of
£150,000 and more, so that individuals on the highest incomes
will receive tax relief on their contributions at the same rate as a
basic rate
taxpayer.
In
the 2009 pre-Budget report the measure was extended so that it would
apply to individuals with gross incomes of £150,000 and more,
where gross incomes include the value of employer contributions to a
pension. In order to ensure that only the most wealthy are affected we
introduced a floor of £130,000, excluding employer
contributions.
Although the
restriction was announced in the 2009 Budget, the introduction of these
changes was deferred until 2011 so as to allow individuals, pension
schemes, employers and Her Majestys Revenue and Customs time to
make the necessary administrative changes. To help assist this process
the Government launched a formal consultation on the implementation of
the restrictions of pensions tax relief at the 2009 pre-Budget report.
This consultation runs until 3 March.
Mr.
Mark Hoban (Fareham) (Con): Could the Minister tell the
Committee in which Finance Bill these changes will be
reflected?
Sarah
McCarthy-Fry: I think we are working on the basis that
anything necessary will be included in the current Finance
Bill that will come from the Budget, but that not all of the measures
will need to be in
there.
Mr.
Hoban: I am grateful to the Minister. Could she tell us
which measures would be in the Finance Bill 2010 and which measures
could either be deferred to a second Finance Bill this year or one in
2011?
Sarah
McCarthy-Fry: No; off the top of my head I cannot. I will
endeavour to find
out.
Announcing
such a change two years in advance of introducing it, inevitably
provides an incentive for those who are likely to be caught by the
restriction to put more into their pension funds before the change
comes into effect than they have been doing in past years, so as to
take advantage of higher rates of tax relief on pension savings while
they are still available. Without action to curb this forestalling, at
least £2 billion of tax revenue would have been at risk over the
two years before implementation of the change, driving up the cost of
pensions tax relief for those on the highest incomes in the short run.
As this would have undermined the intention of the restriction of
pensions tax relief, legislation was included in the Finance Act 2009
to prevent it. It is essential for us to protect the public finances,
and in addition to the existing powers in legislation to protect
against avoidance, we will be willing to take further action as
necessary.
This
legislation introduced an income tax charge called the special annual
allowance charge, which is applied to pension savings in excess of a
special annual allowance, during the tax year for individuals whose
relevant income is £150,000 or more. For all individuals with
this level of income, the special annual allowance protects at least
£20,000 of pension savings, which will continue to receive full
tax relief. For many of those individuals, the level of contributions
that receive full tax relief may be higher, depending on their normal
pattern and rate of contributions immediately before Budget day.
However, if individuals increase their pension savings beyond their
normal pattern of contributions, the special annual allowance charge
applies to in effect withdraw the higher rate relief on the additional
pension
savings.
The
purpose of the special allowance charge is to ensure that those who
seek to forestall receive only at the basic rate. For the current tax
year, 2009-10, the rate of the special annual allowance charge to
recover the higher rate relief given is 20 per cent., which is the
difference between the 40 per cent. higher rate of income tax and the
basic rate of 20 per cent. The introduction of the 50 per cent.
additional rate in April this year, however, means that the 20 per
cent. charge will be insufficient in many situations to remove the
advantage of higher rate relief, because after April, some individuals
will receive tax relief on their pension contributions at 50 per
cent.
An
alternative rate therefore needs to be used for 2010-11, but any flat
rate for that period would mean that the correct tax relief given might
not be recovered. For example, a flat rate of 20 per cent. would
undercharge those individuals who receive tax relief on pension
contributions at the top rate of 50 per cent., while a flat rate of 30
per cent. would restrict tax relief on additional pension contributions
well beyond the basic rate for many people who pay tax at 40 per cent.,
especially those who are only just above the £150,000
threshold.
The
order therefore alters the rate of the special annual allowance charge
from April 2010 so that it withdraws higher and additional rate relief
according to the rates of relief that would otherwise be due to the
individual on their pension
contributions.
Mr.
Hoban: Can the Minister confirm that this does not apply
to employers contributions?
Sarah
McCarthy-Fry: Yes, I believe that it does apply to
employers contributions. I will get back to the hon. Gentleman
on that. It is another anti-forestalling measure where the employee can
ask the employer to make additional contributions into their pension
for forestalling an order to withdraw.
[Interruption.] I may come back to the hon.
Gentleman on that
one.
I
will give some examples to show what the order will mean in practice.
Consider an individual whose income is above the 50 per cent. limit
after taking account of all their reliefs and deductions. The recovery
charge for them will be 30 per cent. on all their pension
contributions, because they would otherwise have had relief at 50 per
cent. on them all. Alternatively, consider an individual whose income
would be under the 50 per cent. limit before taking account of
deductions for pension contributions. The recovery charge for them will
be 20 per cent. on all their pension contributions, because
they would otherwise have had relief at 40 per cent. on them
all.
Some
individuals will have income below the 50 per cent. limit after taking
account of all their reliefs and deductions, but above the limit before
deductions for pension contributions. That means that tax relief on
some of their pension savings would be at 50 per cent. and the
remainder at 40 per cent. The recovery charge for them will be 30 per
cent. on the amount relieved at 50 per cent., and 20 per cent. on the
balance.
In
summary, the statutory instrument is simply a technical change that
ensures that individuals continue to get the correct amount of tax
relief to which they are entitled. When I sum up, I will endeavour to
clarify whether I confused the anti-forestalling regime with the actual
regime, and I will provide the hon. Gentleman with an
answer.
2.38
pm
Mr.
Hoban: It is a pleasure to serve under your chairmanship,
Ms Walley. Schedule 35 of the Finance Act 2009 provides the Government
with powers, through an affirmative procedure, to vary the rate. The
Finance Bill Committee debated that schedule the day after the
Exchequer Secretary was appointed and many of us on that Committee had
anticipated seeing her in action that day, but I think that she was
bogged down in finishing off business in her previous
Department.
There
was, and there remains, a great deal of concern about the pension
reform that the Government introduced in the Budget. When I talk to
representatives of the employer organisations of multinationals, they
tell me that there is a concern that the Governments measures
will make the United Kingdom a less attractive place for senior
executives to be based. Given the global market for talented senior
employees and the important role that they play in running businesses
and ensuring that they remain in the UK, have the Government thought
through the measures impact on the UKs competitiveness?
I notice that earlier this
week
The
Chairman: Order. I hope the hon. Gentleman is referring to
the business before us and not the wider legislation to which it
relates.
Mr.
Hoban: Thank you for your guidance, Ms Walley; I am in
danger of getting carried away. Schedule 35, which the order amends,
introduces the anti-forestalling
measure. The 2009 Act set a 20 per cent. rate and what we are discussing
here is an increase in the amount recovered from 20 per cent. to 30 per
cent. as a consequence of the introduction of the 50p rate of income
tax. There is an issue about competitiveness, which the
Minister
Mr.
Jeremy Browne (Taunton) (LD): Given the hon.
Gentlemans concerns about Britains competitiveness
compared with other comparable nations, is he an enthusiast for
removing the 50p tax rate at the earliest
opportunity?
Mr.
Hoban: Ms Walley, you would rule me out of order if I
pursued that route, which has been well discussed in other forums and
in the concluding debates on the 2009 Act, if the hon. Member for
Taunton would wish to go back and consult the
record.
Is
the Minister content that the structure of the charge ensures that
there will not be an adverse impact on the marginal rate of taxation
suffered by employees? Will she say a little more about the inclusion
of employers contributions in the calculation? One of the
outstanding issues from the Governments announcements concerned
the valuation of the employers contribution. Clearly, that is a
relatively straightforward matter when the employers
contribution is to a defined-contribution schemewhere it is
simply the cash on which the evaluation is based. Will the measure also
cover employers contributions where there is a defined-benefit
scheme, where a much more complex calculation is required to ascertain
the true value? I would be grateful for clarification on
that.
2.42
pm
Mr.
Browne: It is a delight for me to serve for the first time
under you chairmanship, Ms Walley.
I feel some
sympathy for the Minister, because the measure seems to be a fiendishly
complex set of proposals that the Government have to put in place to
try to deal with all the loose ends and unintended consequences of
their own policies. Those policies were meant to demonstrate clear
dividing lines in political terms between the Labour party and the
Conservative party and probably created all kinds of unintended work
for Treasury officials that they might think is beyond their obvious
duties. However, here we are and we are considering the consequences
today.
The Minister
would have been on a much better footing had she taken the view, and if
the Treasury had taken the view, that pension relief would be available
at the basic rate for all people, regardless of whether they were basic
rate taxpayers or paid the marginal rates of 40por even, from
April 2010, the 50p rate. Everyone would know where they stood in those
circumstances, with the equalisation of pension relief. There would not
be unfair consequences for people on standard rate earnings who benefit
from much less generous relief than people who are higher rate
taxpayers. That is the current position, but because the Government
have tied themselves in knots, they have to introduce this sort of
proposal, which makes their life much harder.
I am also
interested to know the answer to the question asked by the hon. Member
for Fareham about the impact on marginal rates. There is something
symbolically significant about the 50p rate, because that is half of
what one would earn on marginal rates. The
marginal rates, once one takes reliefs into account, may be different.
The hon.Gentleman made an extremely valid point about what the marginal
rates would be for different categories of earners and whether some
might, as a consequence of this and other measures, pay significantly
more than 50p.
There are two
further points that I should like the Minister to talk about briefly.
The first is the basis on which the assessment was made to try to
prevent avoidance measures, which she touched upon in her opening
remarks. From my recollections and from what I have read more recently,
I understand that the basis is not an annual pattern of contributions
but a quarterly one. Concerns have been raised in other quarters that
the Governments attempts to prevent people from dodging the tax
have led to people who have entirely legitimate, reasonable and normal
patterns of earning and taxation being caught by the measures in a way
that would not, I imagine, have been
intended.
Mr.
Hoban: I wonder why that has suddenly come to the hon.
Gentlemans attention, when it was part of the debate that we
had on 18 June 2009. He contributed briefly to that debate on schedule
35, which tackled the problem of the pattern of
contributions.
The
Chairman: Order. It is our role to ensure that we confine
ourselves to the business in hand this afternoon. I would not advise
the hon. Gentleman to go down that
route.
Mr.
Browne: Thank you, Ms
Walley.
Mr.
Michael Mates (East Hampshire) (Con):
Rescued.
Mr.
Browne: Far from feeling rescued, I feel as though I was
bowled a full toss, was about to hit it into the crowd and had my bat
taken away. But never mind. That is the position, you are the umpire,
Ms Walley, and your ruling is of course accepted. I am keen to ensure
that there are no unintended consequences of the Governments
measures in any circumstances. A point has been made that is relevant
to the debate: the measures to try to ensure that loopholes in the
legislation are not exploited have the scope to catch out people who do
not seek to exploit those loopholes. Such people have a genuine
grievance, and the Minister could usefully address that in the
debate.
My
final point is on the retrospective impact of the measures. I
understand that the restrictions will apply from 2011, but that the
legislation goes back to 2009. That again touches on the wider debate
about the Government trying to stop people declaring income in patterns
that are to their tax advantage, but potentially penalising people who
do not seek to pay any less than the Government and others might expect
them to but whose earning patterns perhaps put them at a disadvantage
through no fault of their own. I would be grateful for the
Ministers response on all those
issues.
2.47
pm
Sarah
McCarthy-Fry: I thank both hon. Gentlemen for their
contributions to this short debate. I shall take the contribution from
the hon. Member for Taunton first. He seems to suggest that we should
have gone
further with the main measure, and not had a higher income threshold for
reducing the tax relief, but have everybody on whatever income getting
only 20 per cent. basic rate tax relief. The hon. Member for Fareham
asked whether that would damage British competitiveness. When trying to
achieve fairness, we also have to look at competitiveness and at people
wanting to locate to this country. We have the balance right, and the
proposal by the hon. Member for Taunton goes the wrong way. It would be
interesting to see what effect it would have on the pension savings of
people of modest incomes. Coming back to fairness, I want to make it
absolutely clear that the decision was not one of political expediency
but of fairness. It is important to put that on the
record.
In
trying to respond to the hon. Member for Taunton on the reason for the
anti-forestalling measure in the first place, I shall test Ms
Walleys patience just a little. We introduced the measure in
2009. We needed to give the industry time to adjust. We are trying to
balance the complexity necessary to make it as fair as possible, with
the simplicity so that it is not too complex. That is why we wanted
time to consult with the industry, which is what we are doing. However,
there would have been a risk to the Exchequer and the public finances
if we had not put in the anti-forestalling measure. I think that I am
now rehearsing Finance Bill arguments. We did look at patterns, but the
special allowance charge was put in to protect people who had annual
patterns rather than regular patterns, and therefore did not fit in the
other anti-forestalling measure.
The hon.
Member for Fareham asked what was likely to be delivered in Finance
Bill 10. The core aspects will have to go into Finance Bill
10, but that depends on the outcome of consultation, which has
not yet closed. The core aspects in my view are: who is affected, that
is, income definition and thresholds; what the restriction applies to;
all contributions, those made by individuals and others on their
behalf; the basic method for valuing deemed contributions to DB
schemesa very large part of the consultationand how it
will actually be delivered. The rest of it can probably wait until the
following year. We intend to legislate for the core aspects by means of
this years Finance Bill.
We are doing
this because, with a new 50 per cent. top rate of tax, the
disproportionate benefit for those on highest incomes would have been
even bigger. We do not think that is right and we do not believe it is
sustainable or
affordable.
I
shall attempt to answer on the employer contributions. Employer
contributions are not taken into account for the purposes of qualifying
income for anti-forestalling but they are taken into account when
deciding income when applying the charge. That is, once someone has
qualified for the charge, employer contributions are taken into account
as to whether the charge is paid.
Mr.
Hoban: On what basis will employer contributions to a DB
scheme be valued during the period of anti-forestalling legislation?
Will it be on a cash basis or will there be some calculation of their
deemed
value?
Sarah
McCarthy-Fry: I imagine it will be on the basis of a
deemed value. I will probably have to write to the hon. Gentleman about
that as I do not imagine I am
going to get the answer now. I am probably once more getting confused
with the wider situation with the ongoing
consultation.
Mr.
Hoban: It is quite important. The legislation came in with
the Finance Act 2009. People will expect some clarity about the way in
which the anti-forestalling arrangements will work and the basis on
which they will have to calculate the tax due on the contribution.
While I understand the need to consult for the permanent reforms, these
are amounts of tax likely to be paid this year, or assessed on income
this year. It is important that there is some clarity about the way in
which the contribution to a DB scheme by the employer is valued
now.
Sarah
McCarthy-Fry: Yes. I take on board the point that the hon.
Gentleman makes. We are still consulting on how the deemed DB
contributions are to be valued. The answer is that the calculation is
made using a flat factor, which is what we currently use for the annual
allowance. As far as the annual allowance is concerned, this order does
not change anything that was calculated within the annual allowance. It
is using a flat factor for anti-forestalling purposes. For the more
permanent measure, different methods are being considered within the
consultation.
Mr.
Hoban: I am sorry; does the Minister mean by a flat factor
that the value is the cash value of contributions rather than a
multiple envisaged to be used in later schemes? Will she explain
further what a flat factor means?
Sarah
McCarthy-Fry: We are getting into rather more complex
areas here. I will be happy to write to the hon. Gentleman. I can tell
him that it is a flat factor of 10. That is also one of the measures in
our consultation document. It explains the three options that we have
put forward. In the document, we said that while we used flat factors
for the annual allowance for simplicity, we did not think that was the
best way to go forward. We were proposing to use age-related factors,
but that is one of the questions in the consultation document. I am
sure that if the hon. Gentleman gets a copy of that, it will all be
laid out there for him.
We think
there are still good incentives for individuals to save in pensions.
Even those individuals fully affected by the restriction of tax relief
on pension contributions will be able to receive 20p in tax relief per
pound investedthe same as a basic rate taxpayer. Investment
growth in a pension remains untaxed. Individuals can still benefit from
a tax-free lump sum of up to 25 per cent. of total pension rights.
Individuals who are affected by the restriction will still be entitled
to receive a maximum of £51,000 in tax relief on pension
contributions each yearnearly twice the male median earnings in
the UKif they make contributions up to the annual allowance
limit. The order is a technical amendment to the annual allowance
charge in order that those people who are affected by the 50p tax rate
still only continue to get the 20 per cent. on their contributions,
over and above the annual
allowance.
Question
put and agreed to.
2.55
pm
Committee
rose.