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Session 2009 - 10
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Delegated Legislation Committee Debates



The Committee consisted of the following Members:

Chairman: Joan Walley
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 Majesty’s 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 Government’s 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 measure’s impact on the UK’s 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. Jeremy Browne (Taunton) (LD): Given the hon. Gentleman’s concerns about Britain’s 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 employer’s contributions in the calculation? One of the outstanding issues from the Government’s announcements concerned the valuation of the employer’s contribution. Clearly, that is a relatively straightforward matter when the employer’s contribution is to a defined-contribution scheme—where it is simply the cash on which the evaluation is based. Will the measure also cover employer’s 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 40p—or 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 Government’s 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. Gentleman’s 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 Government’s 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 Minister’s response on all those issues.
2.47 pm
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 Walley’s 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 schemes—a very large part of the consultation—and 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 year’s 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 invested—the 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 year—nearly twice the male median earnings in the UK—if 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.
 
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