Clause 194 - Short service refund lump sum charge

Finance Bill – in a Public Bill Committee at 4:30 pm on 15th June 2004.

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Question proposed, That the clause stand part of the Bill.

Photo of George Osborne George Osborne Conservative, Tatton

As amendment No. 113 was not moved, we have a couple of hours more than we expected. We will see whether my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who is not here and who should have moved that amendment, reads his Committee Hansard and spots what has happened.

The clause relates to the income tax levied when there is a short service refund lump sum—in other words, when someone has not been in an occupational scheme long enough to qualify for any of the benefits. Under the Pension Schemes Act 1993, that cannot be longer than two years.

Governments have become progressively stingier in this area. In the 1980s, the tax charge was 10 per cent., and could be applied to people who had been working for up to five years. In the 1990s, the tax charge was doubled, and the five-year period was reduced to two.

The reason why I wanted to speak to this clause is because I have uncovered a new stealth tax, which, of course, is very exciting. It is like discovering a new species of Amazonian butterfly.

Photo of Steve Pound Steve Pound Labour, Ealing North

They are not that rare.

Photo of George Osborne George Osborne Conservative, Tatton

Before the hon. Gentleman said that, I was going to point out that there are hundreds out there that are not uncovered. Here we have uncovered one: the Government are introducing a 40 per cent. tax rate for lump sums of more than £10,000, doubling the rate for larger sums. That prompts the question, why? I thought that the buzz word of the Bill was ''flexibility''—flexible retirement; and allowing people to do several jobs while moving around with their pensions. It turns out that the more familiar buzz words of ''stealth tax'' are creeping back. One cannot allow a Government increase in taxation to go uncommented on, so I thought it would be interesting to draw it to the Committee's attention.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I am afraid that I shall have to disappoint the hon. Gentleman. Before addressing his specific points, I shall deal with the overall clause.

The clause provides for a charge to income tax for a registered pension scheme. We are talking about a

short service refund lump sum to a scheme member. Such a lump sum will arise where a member of an occupational pension scheme receives a refund of his or her pension contributions following a short period of employment, which does not bring with it a right to pension benefits under pensions law. The rate of the tax charge is 20 per cent. on the first £10,800 of the lump sum, and 40 per cent. on the rest. The hon. Gentleman rightly draws attention to that figure, which I shall justify in a moment. The tax is payable by the scheme administrator, who may deduct the tax from the payment, so that the member receives the lump sum after tax. The tax charge is necessary, for pension contributions will have received tax relief when they were paid.

The tax rates are designed to recoup the tax relief that has already been given on pension contributions. By definition, such contributions will have been paid over a very short period of time—generally two years or less—and pension contributions in excess of the £10,800 threshold are likely to have received relief at the higher 40 per cent. rate of tax.

Introducing generous limits on the amount of tax-relievable pension contributions—compared with current rules, under which, typically, the maximum that can be tax-relieved is 15 per cent. of remuneration—will mean that, without such a differential, there will be a tax advantage to putting in contributions of up to £200,000. Such contributions will receive tax relief of 40 per cent. and claim a refund of contributions that will be taxed at only 20 per cent. Therefore the provisions are both necessary and desirable.

Photo of George Osborne George Osborne Conservative, Tatton

They may be necessary; they may even be desirable, but will the Minister concede that they are a new tax—a tax increase?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I do not believe that the provisions are in any sense less generous than the current regime. I have already explained how the tax relief system operates: the maximum tax that can be relieved is 15 per cent. of remuneration. We have to set the limits in such a way as to recoup the tax paid. I do not accept that there is any additional tax-raising on the part of the Exchequer through this clause.

Question put and agreed to.

Clause 194 ordered to stand part of the Bill.