Schedule 35 — Pensions: special annual allowance charge

Care Homes (Domestic Pets) – in the House of Commons at 6:30 pm on 8th July 2009.

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Photo of Michael Lord Michael Lord Deputy Speaker (Second Deputy Chairman of Ways and Means)

With this it will be convenient to discuss the following: Amendment 29, page 293, line 4, leave out subsection (2).

Amendment 30, page 295, line 46, at end insert—

'(3) When an individual establishes a protected pension input amount in respect of any of the schemes listed in paragraphs 8 to 13 below and their arrangements change, the protected input amount applies to the new arrangement.'.

Amendment 25, page 296, line 25, at end insert—

'(3A) Where contributions are not paid in accordance with subsection 3(c) above, the protected pension input amount is the lower of £50,000 or the average of contributions made over the last three years.'.

Amendment 26, line 297, line 23, at end insert—

'(3A) Where contributions are not paid in accordance with subsection 3(c) above, the protected pension input amount is the lower of £50,000 or the average of contributions made over the last three years.'.

Amendment 27, page 298, line 25, at end insert—

'(3A) Where contributions are not paid in accordance with subsection 3(c) above, the protected pension input amount is the lower of £50,000 or the average of contributions made over the last three years.'.

Amendment 28, page 299, line 15, at end insert—

'(2A) Where contributions are not paid in accordance with subsection 2(b) above, the protected pension input amount is the lower of £50,000 or the average of contributions made over the last three years.'.

Government amendments 49 and 50.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

In the Budget, we announced a restriction of higher rate tax relief for the pension contributions of people with the highest incomes from April 2011. The House well understands why we had to introduce anti-forestalling rules in the meantime to protect an estimated £2 billion of tax that could have been at risk otherwise. The arrangements were designed to be fiscally neutral in the interim period between Budget day and April 2011. The principle that we adopted was to maintain higher-rate relief for continuing regular pension contributions over this interim period but to restrict the relief when contributions were additional to the regular pattern.

We have defined regular contributions as those made quarterly or more frequently—an established pattern of pension savings where it is readily possible to identify the typical level of contributions. The level is also likely to be consistent, as part of a contract with an employer or with a pension scheme direct, so it is relatively easy to isolate forestalling as distinct from normal pension saving. It is harder to identify as "normal" contributions that are made less frequently, particularly when that requires looking back over previous years, not least because the A-day changes made three years ago have altered pension saving habits. Irregular contributors have a much more limited track record on which to base judgments on typical levels of contributions, and the payments tend to vary more in size.

Many self-employed people and others, particularly those with personal pensions, make annual contributions or contribute on a more ad hoc basis as their circumstances allow, and we did not want to damage their interests. The regime includes an annual savings limit of £20,000 on which people are entitled to receive higher-rate relief. For some people—a relatively small group—£20,000 will be less than they have tended to contribute to their pension in the years since A-day. Incidentally, it will often be more than they could have contributed before A-day, but not since.

In my written ministerial statement on Budget day and in our debate in Committee, I acknowledged that difficulty and made it clear that I wanted to consider how best to protect annual contributors alongside more frequent contributors, without risking large additional Exchequer losses. So we have Government amendments 48, 49 and 50, providing that if irregular contributions have been made over the past three years, the special annual allowance will be increased to the average of those contributions, but with an upper limit of £30,000.

The approach in the Government amendments is similar to that in Opposition amendments 25 to 28, which likewise refer to average contributions from the past three years and would set an upper limit. I welcome the Opposition's support for that approach. The difference between us, not surprisingly, is what the limit should be. The Government amendments set it at £30,000 while the Opposition amendments suggest £50,000.

The majority of people contributing on a non-regular basis had average contributions below the £20,000 level and so will be fully protected. Of those whose average contributions exceed that level, many are not far above it. We estimate that setting the limit at £30,000 will extend full protection to many annual contributors and to more than three quarters of all those affected. Only the highest quarter of contributors will be constrained at all, and they will see their limit for higher-rate pensions tax relief increased by half as much again, so they, too, will benefit.

I suggest to the House that the £30,000 level is sensible and will bring the costs of the anti-forestalling regime down to an additional £70 million over the next two years—more than would have been the case without the relaxation, but an affordable level. Setting the level at £50,000, on the other hand, would raise costs by £130 million, nearly twice as much. The Opposition amendments would also potentially, though I imagine unintentionally, open a loophole for people with several pensions to have an annual limit of £50,000 on each. This is a difficult area, but I hope that Opposition Members will feel able not to press their amendments and to support ours instead.

I wish to say a word about the other Opposition amendments, which have not yet been spoken to. On amendment 30, I have received representations on the subject of flexibility for those who change provider. I have thought about it, and I accept that we can be more flexible so that if somebody changes pension provider and carries forward exactly the same pension arrangements, they can retain their protected pension contributions. There is a risk, though, of inadvertently opening up significant avoidance. I would therefore like to take the matter forward through regulations, after consulting the industry on draft regulations. I accept the argument that lies behind the amendment, but I hope that on the understanding that I want to deliver that aim, the Opposition will not press it.

One matter not covered by the amendments has been raised with me, which is that the rules on the commencement dates for the anti-forestalling regime are too stringent with regard to the treatment of those who set up new pension arrangements on or just before Budget day. There is scope there, too, to be helpful, and we will discuss the matter with providers and make any change necessary through regulations.

If, as suggested in the Opposition's amendment 29, the income test applied only to the current tax year as opposed to the previous three, that would give people whose income is more than £150,000 a big incentive to reduce it below that level for the two years to which the anti-forestalling legislation will apply. People in that income bracket are often in a position to renegotiate their pay to delay taking income into a later tax year. Removing the three-year rule would put at risk a significant amount of tax revenue—we estimate that it could be £100 million in the two years to April 2011. It is important to bear it in mind that, for the majority of pension savers—98.5 per cent.—schedule 35 changes nothing.

I hope that hon. Members will welcome the Government amendments and that Opposition Members will not be inclined to press their alternative amendments.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 6:45 pm, 8th July 2009

Schedule 35 has caused much concern to many people, including pension providers and the self-employed. They are concerned about the hasty way in which it was introduced, without consultation, the rough edges that it creates and its discrimination against people who do not make regular contributions—quarterly or more frequently. People have made many representations and sought ways of amending the schedule so that the rules apply more reasonably.

The Financial Secretary, today and in Committee, emphasised a willingness to get the schedule right. However, he tempered that from time to time with a focus on the Revenue cost. He argued today and in Committee that some people are in a position to renegotiate their contracts to alter their package, thus taking advantage of amendment 29. However, some people who earn relatively low sums of money this year will have earned a large sum in the first year. I had an e-mail from a member of the public who earned little in the past two years but suddenly landed a contract this year and earned more than £150,000. [Interruption.] He may well have e-mailed other Members, too. That is the joy of e-mailing prolifically. Other examples have been given of other people who have received income in lumps. I want to ensure that the Government, in their pursuit of tax avoidance, do not create too many rough edges in the scheme so that people who are not in a position to manipulate their tax affairs lose out. That is why I tabled amendment 29.

I am grateful to the Financial Secretary for recognising the strength of the arguments behind amendment 30. Several people have mentioned not only a change in the provider of the scheme—obviously people do not want to lose the benefit of protection under the scheme if the business for which they work decides to change pension provider—but what happens when the scheme itself changes. I wonder whether the Financial Secretary could reassure me by saying that he will deal with that through regulation or that it is already covered in the schedule. It would be helpful if he listened to me rather than his neighbour.

We know that several large employers are closing down their defined benefit schemes and moving to defined contribution schemes. I had an e-mail from someone who was in a defined benefit scheme and was concerned that they would lose the benefit of the protected pension input amount provisions in schedule 35. Could the Financial Secretary say a little about how people in that situation would be protected? If someone remains in the same employment, with the same broad employment package, but the employer closes down the DB scheme and the employee is therefore forced to move to a DC scheme, will the protection remain? Given the changes that are likely to happen in the next couple of years and the number of DB schemes that are closing, that will be of interest to many people.

Let me turn now to amendments 25 to 28. I welcome the fact that the Government's thinking has moved. In Committee we looked at either increasing the special allowance from £20,000 to £50,000 across the board or averaging the previous year's contributions. We decided that we wanted to take a hybrid approach, and clearly the Treasury has been thinking along the same lines. We welcome the fact that the Government have moved some of the way, by introducing a £30,000 limit, which is not where I thought they were heading in Committee, when I thought that they were considering simply keeping the £20,000 limit. However, I am still not convinced that they have moved far enough in recognising the difficulties for those who are self-employed who make irregular contributions to their pension funds. I would have preferred a more generous limit, although I take on board the Minister's comments about the cost of the £50,000 limit compared with the cost of the £30,000 limit.

In conclusion, I will not press amendments 29 or 30 to a vote. I am pleased that the Government have taken on board the thrust of amendment 30 and come up with a more elegant and cheaper version of amendments 25 to 28. If the Minister had tabled those amendments rather sooner than the Friday before debating them, I might have tabled a more elegant amendment of my own to change £30,000 to £50,000. However, the Government have moved somewhat, thanks to the pressure from both inside and outside this House. I do not think that the proposed measure is perfect by any stretch of the imagination. Some people will still suffer from the sharp edges that the proposed anti-forestalling measure will introduce, but schedule 35 is certainly in better shape than it was when the Finance Bill was published a few months ago.

Amendment 48 agreed to.

Amendments made: 49, page 302, line 41, at end insert—

'Increased special annual allowance

16A (1) This paragraph has effect where the mean of the infrequent money purchase contributions amount for the tax years 2006-07, 2007-08 and 2008-09 ("the relevant mean") exceeds £20,000.

(2) Where the relevant mean is less than £30,000, this Schedule has effect as if the references in paragraph 1(4) and (5) to £20,000 were instead to the relevant mean.

(3) Where the relevant mean is £30,000 or more, this Schedule has effect as if those references were instead to £30,000.

(4) The "infrequent money purchase contributions amount" for a tax year is the aggregate of any relevant contributions paid in the tax year—

(a) under money purchase arrangements, other than cash balance arrangements, under registered pension schemes, and

(b) less frequently than on a quarterly basis;

(and so is nil if no such contributions were so paid).

(5) But if the infrequent money purchase contributions amount for a tax year would otherwise be greater than the annual allowance for the tax year, it is to be taken to be the annual allowance for the tax year.

(6) "Relevant contributions" means contributions which are—

(a) relievable pension contributions by or on behalf of the individual, or

(b) contributions paid by an employer of the individual in respect of the individual.'.

Amendment 50, page 303, line 18, leave out 'are members of' and insert—

'(a) are or have been members of currently-relieved non-UK pension schemes, or

(b) have been members of overseas pension schemes that were not'.— (Mary Creagh.)