Clause 217 - Annual allowance

Finance Bill – in a Public Bill Committee at 3:00 pm on 17th June 2004.

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Photo of George Osborne George Osborne Conservative, Tatton 3:00 pm, 17th June 2004

I beg to move amendment No. 425, in

clause 217, page 183, leave out line 2 and insert—

'(2) The annual allowance is as follows—

(a) for the tax year 2006–07, £215,000

(b) for the tax year 2007–08, £225,000

(c) for the tax year 2008–09, £235,000

(d) for the tax year 2009–10, £245,000

(e) for the tax year 2010–11, £255,000.'.

The clause sets the annual allowance—the amount by which the value of a pension pot is allowed to increase without incurring a tax charge—at £215,000 for the first year. Amendment No. 425, which is similar to my previous amendment on the lifetime allowance, merely seeks to include in the Bill the allowances for the years 2007–08 to 2010–11, which are set out in the explanatory notes but not in the Bill. Perhaps the Financial Secretary could remind us why that should be the case. She said earlier that they could just as easily have been in the Bill as in the explanatory notes. Surely it would be better to put the figures in the legislation with which people will deal.

Perhaps the Financial Secretary could say a little as well about the logic of the annual allowance. It is possible to think of a system with a lifetime allowance but no annual allowance, and one with an annual allowance but no lifetime allowance. Perhaps she could explain why the Government feel that they need both controls.

In the 2002 consultation document, the Government explained that the prime purpose was to limit the

''tax leakage which can occur when a determined opportunist tries to wash contributions through a pension fund quickly, planning to extract the proceeds improperly.''

Say we have a determined opportunist—let us call him Tony. Surely control must be exercised not on the amount going in but on the amount coming out. The Government say that the reason for an annual allowance is to stop people extracting proceeds improperly. If that is the case, the control should be on the extraction of the proceeds, not on what is going in. Will the Financial Secretary confirm that, as the annual allowance does not apply in the year in which the pension vests, this determined opportunist could pull off the same trick in that year? If Tony were over the age of 50, he could pull it off this year, that year, the next year or whenever the pension vests.

If the measure is supposed to be a key control for the Inland Revenue to prevent some sort of tax

evasion or scam, it has some pretty big holes in it. A pension can vest not only on retirement, but when someone receives redundancy, a scheme winds up, there is ill health or whatever. There are a lot of gaps in that control and, if its purpose is as I have just stated, it is not particularly effective.

The provision will introduce another rule to the system and it could hit the lucky investor. The dotcom boom was not that long ago, and it is perfectly possible to imagine someone putting a £20,000 stake into some shares, seeing them go up 10-fold in a year and going close to or over the annual allowance. It will penalise investor decisions. One feature of the system is that it allows people to put in large sums when they are able to make them, but a good or lucky investor could as a result see their pension pot increase by more than £215,000 in a particular year.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 3:15 pm, 17th June 2004

Either the hon. Gentleman or I, and of course I suspect that it is he rather than I, misunderstands the annual allowance. If an individual put £20,000 into their pension scheme and it went up 12-fold, which would be more than £215,000, it would not break the annual allowance because having been put in the pension scheme it would therefore be within the pension scheme. It is the total pension input amount, not the amount within the pension in a given year.

Photo of George Osborne George Osborne Conservative, Tatton

The hon. Gentleman may well be right, but even if I withdraw that final point on the grounds that it is not as strong as it could be, will the Financial Secretary explain the broader point about the need for the annual allowance as a check—if it is a check—on the gaps in the system that exists? Surely, the check should exist on the improper extraction of proceeds. Why is the provision not in the Bill?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

With amendment No. 425, the hon. Gentleman seems to retread his unsuccessful amendment No. 418, which sought to link the allowance with the increase in national average earnings. As an optimist, he expects to be in government and, mathematically, according to the figures in amendment No. 425, he expects that under a Conservative Government the increase in national average earnings will fall year on year.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The real issue is about whether we should have an annual allowance limit, but I will quickly deal with the question that the hon. Member for Tatton raised about whether the limit should be in the Bill. My right hon. Friend the Chancellor announced the limits in the Budget, they are in the explanatory notes and we will use a Treasury order to introduce them. That is the normal way in which such things are done, and I could not make the intention of the Government clearer than I have made it today.

The hon. Gentleman makes an interesting point about whether we need an annual allowance as well as a lifetime allowance. In an ideal world, perhaps we would not need that additional control. It has been set at a very high level and it will affect hardly any people, although no doubt there will be some who want to put more than £215,000 into their pension pot in the first year. My hon. Friend the Member for

Wolverhampton, South-West made an excellent point, however: it affects only contributions to the fund; it does not affect the investment growth in any year.

So, if the case that the hon. Gentleman raised were to occur, people would be fine. They would eventually be tested against the lifetime allowance, but we have debated that.

I remember spending many happy hours in the Treasury, debating whether we needed an annual limit as well as a lifetime allowance. We concluded that it was necessary in order to make sure that certain possibilities for evasion could not occur. In fact, the annual limit is an integral part of the regime.

I will detail one example of the sort of abuse that could occur, and that I was particularly concerned about when designing the scheme, if we had a lifetime allowance but no annual allowance. Imagine the situation in which, to take a country at random, a United States resident came to live and work in the United Kingdom for a short period, possibly a couple of years, as is frequently the case in, for example, the City of London. Between them, the US resident and his employer put £1.5 million into the employer's UK-registered pension scheme. Both would get full UK tax relief on their contributions, up to the maximum allowed under our proposals. That resident would then go back to the United States to continue working, perhaps with his previous employer, and transfer all the funds from the UK into the fund in the United States of America. There would be no tax charge on that. It would be impossible to test his cumulative pension against the lifetime allowance when, in due course, he took his pension. The UK Exchequer would suffer a considerable loss.

Photo of George Osborne George Osborne Conservative, Tatton

Will the Financial Secretary confirm that that trick could be pulled off if the person was older than the minimum retirement age and the pension was vested in the year in which that person put the £1.5 million into the scheme? There is no annual allowance in the year when the pension vests.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I would not say that that was a trick. In fact, we listened to representations on it, because people need extra flexibility in the year that their pension is vested. However, I gave an example of an opportunistic individual who came to the country, rapidly took advantage of UK tax relief, and then went back to their own country, with us unable to exercise our rights to reclaim some of that money.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

If that American were a member of a UK pension scheme, it would not normally be possible to transfer out sums to a US scheme. If they went back to the US, whatever pension from the UK was due would be paid, but it would be subject to a standard 20 per cent. withholding tax.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Well, of course, we have tax-recovery mechanisms to try to reclaim tax. One of the examples that we might use is the EU directive on mutual assistance and the recovery of debt. There are responsibilities that that individual would have to fulfil. I must say that that is a blunt tool for recovering tax. There would still be avoidance opportunities.

Clearly, if someone was not drawing down benefits in the UK, they would not be taxed on that income in retirement and we would not, perhaps, be able to claim back some of that tax relief. It could pose a significant threat to the Exchequer.

The annual allowance struck us as a reasonable compromise to try to ensure that such short-term, opportunistic behaviour was not able to take place, while affecting few individuals who were resident in the UK for a considerable period and who planned to draw down their pension income in the UK on retirement. As I said, it is an integral part of our reforms. We will keep that aspect of the reforms under review, as we will keep other aspects under review. So, I ask the hon. Gentleman to withdraw his amendment.

Photo of George Osborne George Osborne Conservative, Tatton

The Financial Secretary said that the annual allowance was an integral part, and then said that she spent many hours debating whether it should be in or not, so the Inland Revenue must have thought that it was not necessarily integral. As I say, we share the same objective. We do not want loopholes or opportunities for tax evasion, but I wonder how effective they will be under the current system, because the Government have set a generous annual allowance. US citizens are still able to put in £500,000, or near enough—albeit not £1.5 million, but still a large sum. If they do so in the year when the pension is invested, when they claim an ill-health pension or if there is a redundancy package, the annual allowance does not apply anyway.

I am not going to divide the Committee on this issue—it is a complex extra administrative burden on the system. We will take it on trust when the Government assure us that the annual allowance is necessary. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 217 ordered to stand part of the Bill.

Clause 218 ordered to stand part of the Bill.