I, too, welcome you to the Chair, Mr. Hood. I will take this opportunity to echo the Financial Secretarys remarks about his colleague, the hon. Member for Burnley. I know that she relished her return to the Treasury, and we are all sorry that she has had to step down. I am looking forward to the hon. Member for Portsmouth, North, who is my neighbour, joining the Treasury team, and I might say a little more when she appears at our next sitting. I have grown used to seeing stories in our local paper about the Department for Children, Schools and Families being rebadged under her name, and I am looking forward to reading articles in the local news about her welcoming the appointment of a new member of the Monetary Policy Committee or discussing the level of reserves held by the Bank of England in foreign currencies.
I want to take the debate on the clause as an opportunity to set out some of the background to the changes we will discuss in more detail when we come to schedule 35 and to lay the trail that might put in context the amendments we have tabled to that schedule. When the Committees proceedings started four weeks ago, I said on a point of order that it was the fourth Finance Bill Committee on which I have sat as a Front Bencher, but it also happens to be the fourth Finance Bill in which the A-day rules, which were established in the Finance Act 2004, have been unpicked. We have seen changes twice to alternative secured pensions, the removal of residential and other property from self-invested pension plans, rules restricting recycling of cash lump sums and the abolition of pension term assurance. That set of proposals on A-day had been hard fought for, and it has caused a great deal of concern in the industry that so many changes have been made. Of course, the changes being made in schedule 35 are a precursor to wider changes planned for 2011-12.
The problem arises in the following way: there is logic behind some of the individual measures and some of the changes may be justified, but they send a message to potential savers that they cannot rely on a pensions tax regime being in place for the long term. Indeed, during the 2004 Finance Bill debate, my hon. Friend the Member for Tatton (Mr. Osborne) voiced concerns about the inclusion of residential property in SIPPs. We encourage people to save for the long term for their pensions through the personal accounts, which will be introduced in 2012, but people have no certainty about the tax treatment of their contributions or about how future contributions will be dealt with. That is a disincentive; why would people want to lock up their money for the long term if they are not entirely sure how the Government will tax current and future contributions?
The genesis of the anti-forestalling measures was the Governments announcement in the pre-Budget report 2008 of the 40p tax rate from 2011-12. One of the concerns about the taxs revenue yield expressed at the time was that people would use the generous reliefs available for pensions to off-set their increased tax bill. That point was widely flagged and the provisions under discussion, as well as the other changes announced in Budget 2009 about pension contributions, are a good example of be careful what you wish for, because the concerns have now been picked up by the Treasury and translated into the provisions under discussion.
It is worth noting the current position on the taxation of pensions before turning to the precise details involved. An individual who contributes to an approved pension scheme obtains tax relief at the marginal rate on their contributions, so Members throughout the House currently gain tax relief at 40 per cent. on the contributions that they make to Parliaments occupational scheme. That has been a feature of pension taxation for some time. As part of the A-day regime, there was a shift from what was quite a restrictive maximum contribution of 17.5 per cent. of net relevant earnings for most taxpayers to a recognition that people may contribute to pension schemes in a much more lumpy and less predictable way given the changing nature of employment. The Government therefore introduced a lifetime limit and an annual allowance. The lifetime limit of contributions currently stands at £1.75 million and the annual allowance is the lower amount of either earned income or £245,000.
The Bill offers an additional layer of complexity, because the clarity set out in the A-day rules is now going to be replaced by a second test relating to people who earn more than £150,000. Their contributions will receive a reduced tax relief of 20 per cent. depending onwe will come back to this on a later group of amendmentsthe previous pattern of pension contributions, which is not a straightforward issue. The contributions made by individuals to their pension funds are not the only ones affected; employer pension contributions are also affected, and contributions based on relevant income will lose their exempt status and be classified as a taxable benefit.
A defined-contribution scheme is straightforward as it is easy to define an employers contribution. However, it is more difficult to assess the value of an employers contribution to a defined-benefit scheme of the nature that we in the House are fortunate enough to enjoy. The Treasury has set up a working party with the industry to work out how to value the contributions that businesses make, because, quite often, a global contribution, rather than an amount per individual, is made to such schemes. Then we get into the issue of how we apportion it and how we value the impact of the increase in contributions.
People may think that they can wait until 2011 to plan their futures so that they can see what happens with the scheme that the Government intend to introduce. However, the Government are concerned about people taking advantage of the gap between now and 2011, so have introduced the anti-forestalling measures in schedule 35 which cover the tax periods between now and the introduction of the new regime.
In the number of representations that hon. Members from all parts of the House have received, there have been some recurrent themes. Concerns have been expressed not only by individuals who have written to us about the particular impact on their circumstances, but by the pensions sector. Some comments have been made about the feasibility of the anti-forestalling measures.
Let me turn now to the concerns about how the changes may affect savings, particularly the issue around complexity leading to discouragement. The A-day regime was a very serious piece of work, which involved compromises on the part of both HMRC and the pensions industry to sweep away the eight different tax regimes that then existed for pensions, to move to a much more simple and straightforward system that people could understand. It was hoped that the regime would lead to more people increasing their contributions. However, now they see the anti-forestalling measures, and they know about the changes that are coming in 2011. We have a situation in which there are more complex rules in place. As part of the anti-forestalling measures, which run to some 18 pages, we have the prospect of future regulations. Clearly, there are issues around the valuation of employers contributions. The complexity of the changes could act as a further disincentive to invest in pensions. Tim Breedon, the chief executive officer of Legal & General, said:
The planned cut to tax relief on pension contributions made by higher rate taxpayers would deter saving and would also erode recent efforts to simplify the system. To make savings attractive to people you want simplicity not complexity. And you want stability, not change.
The proposed changes announced in the Budget will reintroduce complexity and further confusion to the pensions landscape and erode consumer confidence.
Rachel Vahey, head of pensions at Aegonit was the head of Aegon, Otto Thoreson, who led the Governments review of financial advice to encourage people to save more for their futuresaid:
This undermines the A-day agreement which was designed to promote long-term pension saving, using the standard Lifetime Allowance to prevent abuse of the system by the rich. That major overhaul of the pensions tax rule was meant to last 30 years rather than three years. Pensions are for the long term so consistency is essential to give people confidence to plan for the future.
As ever, the issue is not just the proposals themselves but the way in which they are introduced. The proposals were sprung on the industry. In the days before the Budget, one or two people suspected that there might be some cap on the higher rate tax relief, but they did not expect to see changes of such a nature.
The Government have broken a hard-earned concordat with the industry on the A-day regime. They have moved away from the concept that underpins those reforms of EET: exempt contributions; exempt investment income and taxable benefits).
I am following the hon. Gentlemans argument with interest. I think that he is slightly overstating his case. Does he accept that 98.5 per cent. of taxpayers will not be affected by the changes at all?
The Minister is getting into the numbers game that the Treasury seems to like at the moment. I will come back to that point a bit later. The Minister will say that the changes affect only the highest earners, but I have some examples of how the rules work in practice which show that they could affect people on relatively modest incomes who may have received redundancy payments in the past or sold a business. Such people will be affected by the changes. The Government present the measure as a tax clampdown on the rich, but there are some hard cases that will emerge from the crude way in which the Government have introduced the anti-forestalling measures. We will discuss that in more detail when we debate the amendments.
As I was saying, there is concern that principles have been undermined. It is worth reflecting on the Ministers point that 98.5 per cent. of people will not be affected by the changes. However, part of the problem is that the measure sends a signal that will lead those people to ask, Well, how can I be sure what will happen in the future? What certainty can there be that the Governments proposal will not be extended further down the income chain in the future? That is the problem that the Government have because, although they believe that the changes affect only a narrow group of people, the concern is what will happen next. People will ask, Do I really want to lock up my money for the long term in pensions or is there an alternative form of saving on which I can rely instead, in relation to which there will be less chance of Government interference and changes to the tax rules? The measure will have a behavioural impact that spreads beyond the narrow group that the Minister believes is affected by the changes.
The changes are being made at a time when the pension system is not in great shape. A large proportion of the population has not saved enough or does not save at all. If the message that they receive from the press, the media and the Chancellor is that the rules are up for debate or change, and that nothing is certain, they will feel reluctant to lock their money up for the long term. We cannot afford to apply any more disincentives to saving. Peoples confidence in the pension regime has been shaken by the financial crisis. Even in these troubled times, many people will see housing as a more reliable asset for investment and as being something that they control. If long-term savings through pensions are undermined, the chances are that more and more people will spend money on housing and might not save at all. That will be to the long-term detriment of not only themselves and their families but the stability of the economy as a whole.
Tax relief on contributions was a way of the Government saying to everyone and I mean everyone, irrespective of earnings that saving for your pension is a good thing and we will encourage it. Now that contract has been broken and if it can be broken for one segment of savers now, it can be broken for others.
So it is not enough that the changes will be restricted to a narrow band of earners. Unintended consequences could affect the culture of saving in the UK. The National Association of Pension Funds has put forward an argument that is difficult to accept, but that reflects reality. If the managers and directors of business no longer have a stake in a pension fund, how will that affect their view of that pension fund? Will they continue to support an expensive defined benefit scheme, or will they decide that they ought to reduce the financial risk to the company and move to a defined contribution scheme? Will the changes accelerate the shift away from DB to DC schemes? That is a difficult argument, but one can see why people think that that will be the case.
The Government say that the measure is about fairness, but it is actually about how they will shore up their revenue projections from the 50p rate. If this was about fairness, the Government would have come up with a more imaginative scheme for how to use the £3.1 billion that the measure will raise to shore up savings and pensions elsewhere in the system. Instead, the additional revenue is going into the Treasurys coffers.
Although we have not tabled amendments to this effect, there are alternative proposals that work with the system, rather than introducing additional complexity, that some in the industry felt could have been used to restrict the tax relief claimed by top earners. The Government could have decided to reduce the lifetime allowance or the annual allowance. That would have restricted the contributions made and gone with the grain of the existing A-day regime. Because this is an income-based system, there will be hard cases at the margin. Someone earning slightly less than £150,000 will enjoy full relief on their pension contributions, but someone earning slightly more than £150,000 will not enjoy that same relief. The Government need to demonstrate that they have thought through the suggested alternatives.
I have set out the background to clause 71 and schedule 35. I shall say a few words about the anti-forestalling measures to set the amendments in context. The measures will apply to anyone earning more than £150,000 who makes contributions between 22 April 2009the date of the Budgetand 5 April 2011 that exceed the contributions previously made on a quarterly or more regular basis. The measures apply only to contributions of more than £20,000. Any contributions that breach the restrictions will be taxed at 20 per cent. Therefore, the Governments anti-forestalling measure works out the pattern of regular savings and takes it into account when looking at the pension contributions. Where the contribution is £20,000 more than the previous pattern of savings, the 20 per cent. tax charge will be applied. At that level, it sounds like a fairly clear and straightforward system, because it assumes that peoples income and contribution pattern is fairly settled.
However, there are people who the regime may catch who do not have a settled pattern of income. They may have an atypically high income one year and if it arises in the two years prior to the year in which pension contributions are made, they will be caught by the regime. It will particularly affect the self-employed and partners in accountancy and law firms, who have variable incomes and contribution patterns. Those receiving generous redundancy packages and using it to top up their pension contributions may also be caught by the measure, as may people who have sold a business and made a one-off gain.
It is a crude anti-forestalling measure that does not necessarily take account of how people run their lives and how their income flows from year to year. Some will feel aggrieved by the way the rules have been set out. Part of the problem is that there has been no consultation; the measure was introduced in the Budget 2009. The Government are consulting on the implementation of the rules from 2011 but, as yet, there has been no regulatory impact assessment on how it will work in practice. The Government need to make clear why this anti-forestalling measure is the right way to proceed and why it will not have the negative impact that many believe it will have on the saving culture in the UK. Not only those directly affected but the wider population will see, yet again, that the message from Government is that one cannot rely on consistency, stability and predictability when it comes to the taxation of pensions.
I start by saying it is a pleasure to serve under your chairmanship, Mr. Hood, but also apologising for coming to the debate a couple of minutes after it started. I extend my apology to the two previous speakers for missing their opening remarks.
We are familiar with this important subject matter. The context is a budget deficit of £175 billion this year and, by the Governments estimate, £173 billion next year. The amalgam of those deficits is more than the total Government spending in the first Budget of the now Prime Minister back in 1997. We are talking vast sums of money so the onus is on all of us to ensure that the money is spent as efficiently and equitably as possible because there is none spare to be used inefficiently. We also live in a society with serious income inequalities. Therefore, as well as ensuring that the money is spent as efficiently as possible, we have to consider whether it has been spent as effectively as possible. Are the people who benefit from the states largesse, through money that they receive or money not taken from themthe effect may be the same, but the approach somewhat differentthe right people? Could the money be better targeted to achieve either economic or social objectives, or both? The reason why I give that context is my partys view that the current situation that we are seeking to amendthough only in a modest fashion is unreasonable. Somebody who earns £20,000 a year enjoys much less generous relief on their pension contributions than somebody who earns £120,000 a year.
The reality of the relief is based on the highest rate of tax paid. That is why the relief is notionally less generous for someone earning £20,000 than someone earning £120,000. It is the nature of that system. The system is not intrinsically wrong; the relief focuses on tax that is already paid. It is relief on tax being paid.
The rationale given is that people will pay that level of tax, but they may not. Somebody may earn a higher level of income, but when they reach retirement age not actually be eligible to pay the top rate. There are difficult choices to make. Everybody in the Committee has to ask themselves whether, if we were starting from scratch, the best way we could think of to spend billions of extra pounds was to give additional relief on pension contributions to the richest people in the country. Or, as my party is proposingI will come to this, but not at great length as I do not wish to test your patience, Mr. Hoodwhether that money could be spent more efficiently and effectively on people with lower incomes. That is the sort of radical thinking that I would hope at least some of the parties represented in the Committee would be willing to consider.
When the Minister intervened on the hon. Member for Fareham, he said to the Committee that the measures being put forward by the Government affected only 1.5 per cent. of the population. What we have to remember is that people who donate large amounts of money to political parties and people who edit national newspapers are rather heavily represented in that 1.5 per cent. of the population. I would not say for one moment that that would in any way weigh upon our deliberations. I only observe that that is the case. Everybody in the Committee would do well to acknowledge that, rather than to pretend that there is not a degree of realpolitik affecting our considerations.
Perhaps I am showing my naivety as a representative of what is currently the third party in British politics in thinking that we should be bending over backwards to try to do more
Thank you, Mr. Hood. I am too often affected by my own modesty[Laughter.] My party, as I should remind the Committee, finished second in the national vote share in the local elections earlier this month. But in terms of the numbers of Members of Parliament in this House, we are third.
I suppose there is a reasonable case to be made that we are not sufficiently considerate of the financial sensibilities of newspaper editors and potential big donors to political parties when we make our contributions to this Finance Bill Committee. A wiser way to order our affairs would be to give greater incentives to people on low incomes to work and have greater self-reliance; to allow them to keep a greater proportion of their income and to finance that by ending pension relief above the basic rate. That would be a better way to spend the money. It would create a fairer society and at the same time a more economically mobile and dynamic society.
I am not sure from whom the hon. Gentleman has been receiving representations. If he has had letters from national newspaper editors or the few wealthy donors to his party, perhaps he should tell us. The people who have contacted me about this have been pension advisers, self-employed people and people who pay contributions on an annual basis who are in mainstream businesses. A large number of people who are affected by this have made their concerns known. He should be careful about whose motives he impugns.
A lot of people are choosing to make representations. I acknowledge that not all of them edit national newspapers. But I would be surprised if the hon. Gentleman had had large numbers of representations from people with incomes of £10,000 or £12,000 a year saying that the Government should continue to give relief on pension contributions to people earning £200,000 a year as they would prefer that to raising the starting threshold for income tax to £10,000 as proposed by the Liberal Democrats. I would be more than happy to give way to him if he wishes to read out some of those representations, but I suspect he has not had any. What he has had is representationsthey are perfectly legitimatefrom interested parties such as those who run pension funds and obviously want to see the maximum incentive for people to contribute to those pension funds, including high earners.
I am trying to step back and look at the scene as a whole. As I reminded the Committee at the outset, we are running a massive public deficit. In the United Kingdom people in the bottom decile pay a higher proportion of their overall income in tax than those in the top decile. So we have to ask whether we are spending money as effectively as we might by giving very generous pension relief to relatively high earners and not targeting those with much more modest incomes.
I believe we could do much more for people on low incomes to give them incentives to work. The tax burden on them, especially when they lose some benefits as they earn money, is quite often a disincentive to work. Lots of people on low incomes are, for my tastes, overly reliant on the largesse of the state. I should like them to feel a greater sense of self-reliance and to feel that their work and their endeavours helped them to get on in life. That would be a better use of this money than giving pension relief at a higher rate. My partys position is that there should be some pension relief. We recognise that it is valid, but we would restrict it to the basic rate.
The Government have made a modest step in that direction, which I fear shows only their timidity at this stage of their life. Nothing has been done for many years, and we now have this slightly messy and slightly complicated proposal that will, as the Minister acknowledges, reach a modest number of people. It will limit the relief to people with earnings of more than £180,000 a year. That could be seen as a step in the right direction by someone who takes the view that I start with, but the Governments timidity is unlikely to win them many friends or bring in enough money to make a substantial difference. There is a feeling that this is a gesture, rather than an attempt to recast the tax system meaningfully.
The only other matter that I want to touch on at this stage is one on which I agree with the hon. Member for Fareham, as I often do. The Government should re-examine the idea that people have normal patterns of pension contributions, because it seems to be based on a mindset that everyone has a monthly incomea sort of pay-as-you-earn income. That is often so, but may not be. People with different incomes and some who in some years may not have any income, but in other years, quarters or months earn a reasonable amount have contacted me saying that their pension contributions are haphazard, and that they are not trying to avoid taxation or behaving improperly, but that the nature of their income is that the returns are not consistent over a year or a number of years.
At the weekend, I received a representation from someone who is not my constituent about exactly that point. He is a free-lance contractor and had had no income for a couple of years, but has landed a significant contract that will take him over the £150,000 threshold. He would be caught by the provision. If that income had arisen in the first year and he was paying only modest pension contributions this year, those contributions would be taxed at 20 per cent.
That is precisely my point, and would have been avoided if the Government had taken the route that I suggested of not having the strange threshold kicking in at £150,000 and having basic rate relief for everyone. However, they have taken that route, and the relief rate falls dramatically at that arbitrary figure. We cannot describe it as a poverty trap, but it is an income trap for people who may face a disincentive to go just over the threshold. They may remain just under it, which would be a slightly perverse consequence.
The nub of the hon. Gentlemans point is that some peoplethose who run their own businesses are an obvious examplehave big fluctuations in their income, depending on whether they secure a contract, or even on factors such as the weather that may affect their business. Those people may lose out in a way that the Government do not intend. I acknowledge that trying to alter the legislation so that those people do not miss out could provide greater scope for loopholes and may make it more complicated, but I still think that there is an onus on the Government to acknowledge the perfectly reasonable point made to the hon. Member for Fareham over the weekend by a number of self-employed people. On that note, we will have an opportunity to discuss the amendment in greater depth, but that lays out my broad approach to the Governments thinking in this area.
I agree with much of the thrust of the argument put by the hon. Member for Taunton. Ultimately, this is quite a mess. We are obviously in particularly difficult economic timesexceptionally difficult economic times. The cat was slightly let out of the bag by the Minister when he pointed out that 98.5 per cent. of people would not be affected by the provisions. The fear for many on our side is that much of this is driven less by economic, financial, or any medium-term, let alone long-term fiscal considerations, but much more by short-term political considerations.
As the hon. Gentleman says, clamping down on higher rate taxpayers in regard to pensions is a very symbolic move. As my hon. Friend the Member for Fareham rightly says, we need to develop much more certainty in the pensions system. Failure to provide that certainty will be catastrophic for long-term saving. There have been the mis-selling scandals, many of which were not anything like as scandalous as the press would have us all believe. The pensions industry caved in rather too quickly to a lot of the pressure in relation to, for example, the sale of endowment mortgages and other savings-type products, and the ongoing problems with Equitable Life. As my hon. Friend rightly says, many people now think, Why on earth put money into pensions?
Catastrophically, in many ways, anybody under the age of 35 almost certainly will have simply looked, insofar as they have any savings, to put them into the property market, which has seen very good returns for most of the past decade or so. We will see what happens to the property market in the immediate term; it has had a more rocky time in the past 18 months. That cannot be a very sensible situation. It begs the obvious question about the in-built tax advantages of owning domestic property. If we start to unravel that, certainty about long-term savings and investments is undermined. My hon. Friend expresses a deep concern on that point.
One hears various statistics bandied aroundthe Minister will know them better than meabout the number of people who benefit from higher rate tax pensions relief as a proportion of the overall money that goes to pensions relief. The real issue is that we have got to encourage people who earn rather less to save more, not the other way roundnot try and equalise in this way. The practical reality, and we should all be far more candid about this, is that the reason why quite a lot of people in our society do not save for their pensions is that they simply do not earn enough money to make any worthwhile saving.
Next week, I think, the Saving Gateway Accounts Bill comes back to the Commons. That is, in my view, a good attempt by the Government to achieve precisely that objective, although it is targeted at people with very low incomes. The hon. Gentleman is probably talking about people who earn slightly more, but not enough to necessarily be incentivised by these measures.
The hon. Gentleman is absolutely right, but that has always been the problem; there is that group in the middle, which so often becomes larger and larger. Certainly in relation to house prices, my constituency is massively polarised between people who are, by any national standards, extremely wealthy and those who are so poor that they qualify for social housing. That is increasingly becoming a problem not just in the centre of our cities, but in many suburban areas and is an issue that faces many of us as constituency MPs. Part of the difficulty is that we need to try to encourage a saving culture. We have to be realistic. A lot of people on relatively low wages with relatively chaotic working patterns will never be able to save very much. The welfare trap is also a pretty strong disincentive. People take the view, Why save a relatively modest amount of money if almost all of that is going to be taken away when it comes to qualifying for pensions at a later stage in life?
On the Saving Gateway Accounts Bill, which was mentioned by the hon. Member for Taunton, I cannot help thinking that if the Government really wish to make a difference in this area they need to give the green light to people trusting in our savings and pensions products, not just for the next few years during the economic difficulties but for decades to come. One of the most important elements of that has to be certainty about treatment. My hon. Friend the Member for Fareham put it extremely well when he said that this measure undermined that sense of certainty about the pensions treatment.
In many ways, the real risk is that the overall pot that will be saved by everybody, whether they are in the 98.5 per cent. or the 1.5 per cent. of earners, is likely to diminish massively as confidence begins to drain away that pensions can be a reliable way of looking after ones future and a way of promoting self-reliancesomething that I think all of us in the political classes would support.
We announced in the Budget that the Government intended to restrict pension tax relief from April 2011 for people on annual incomes of £150,000 or more, as an important contribution to the fiscal consolidation that is now required as a result of the global crisis. The clause introduces schedule 35, which protects the Exchequer from forestalling between now and April 2011. That schedule comprises 13 pages. I think that the hon. Member for Fareham said 18, and I shall be vigilant for other arithmetical errors that might arise during this debate. We will, of course, have a number of debates about some of the detailed points that he has raised in his amendments.
I shall say a little about the background to the schedule. Restricting pension tax relief for those on the highest incomes will be an important part of consolidating the public finances in the medium term. To develop the perfectly fair observation made by the hon. Member for Taunton, those with annual incomes of £150,000 or more represent, as I said in my intervention, 1.5 per cent. of pension savers. Last year, that 1.5 per cent. received a quarter of all pension tax relief received by pensions savers. It is therefore right to address that disproportionate benefit as part of fiscal consolidation. I go further, and say that it would not be sustainable to allow that arrangement to continue, given the scale of consolidation that is now required by the global crisis.
That is an interesting statistic. I wonder whether the Minister knows what the proportion of total savings, or the total percentage of revenue that isI am not putting this very precisely am I, Mr. Hood? What proportion of the total amount does upper rate relief, as opposed to basic rate relief, constitute?
I shall do my best to forestall and filibuster while that information comes through.
What I tried to address in my brief contribution earlier was whether more attention should not be paid by the Government to the 75 per cent. rather than the 25 per cent. of the pool, by trying to encourage the 98.5 per cent. of people who will not be affected by the measure to ensure that they invest rather more. We can bandy around statistics that show a considerable skew in a particular direction, but is not the risk that the lack of confidence and certainty that is being brought in will have a detrimental effect on many of the 98.5 per cent. who could be doing rather more to boost the 75 per cent. of relief that is passed on in their name?
The hon. Gentleman is, of course, right. We should be attending to the incentives to saving in pensions for people on low incomes, and we are doing that. The Saving Gateway Accounts Bill is a good example of that, and the changes that we will introduce with pension accounts in a couple of years are another. We have rightly been very diligent in improving those incentives, but I disagree with the hon. Gentlemans suggestion, which is a red herring, that changing the arrangements for the highest-paid 1.5 per cent. will act as a deterrent for people on lower incomes. There is no basis for that suggestion. We need to be clear-sighted about the change that is being made and the effect that it will have.
From 2011, tax relief on pension contributions or pension benefits accrued, including contributions made by employers, which are currently an untaxed benefit-in-kind, will be restricted to 20 per cent. for those with incomes of £150,000 and more. Of course, 20 per cent. is the rate that people in the category that the hon. Gentleman referred to receive currently.
We have already started to talk with the industry and pension savers about how best to implement the change, and we will issue a formal consultation in due course. To have introduced the changes ahead of April 2011, before there had been time to consult properly, would have risked disruption for savers, employers and pension schemes. I believe everyone understands that this is a complex change. We need to get the details right, and that will take some time. However, a gap between the announcement on Budget day and implementation in April 2011, in the absence of the clause and schedule, would have allowed those who will be affected to attempt to forestall the new rules, and, in doing so, to obtain even more tax relief for pension saving.
Clause 71 and schedule 35 protect the loss of at least £2 billion over the next two years which could arise from people on incomes of more than £150,000 who are affected by the restriction of higher rate relief on pension contributions increasing their contributions or rate of pension benefit accruals now, to get the benefit of the higher rate tax relief that will not be available in the future.
The legislation also looks to protect normal pension-saving behaviour and, as far as possible, to allow for different types of pension arrangements without putting tax revenues at risk. I do not agree with the hon. Member for Taunton on this. The principle that regular pension saving should continue to benefit from higher rate relief up until 2011 is right, but we need to ensure that there is not an invitation to others to pile in and take advantage of relief which they would not otherwise have taken advantage of and which they will not be able to take advantage of from 2011.
I do not know whether the Minister can provide some clarity on his estimates of the take from the measure. The Red Book says that the take will be £200 million for 2011-12, and in a footnote states that the yield will be £3.1 billion for 2012-13. He said that the anti-forestalling measures could save about £2 billion of revenue over the next two years. Could he be a bit more transparent about the Governments estimates of revenue raised from the measure? They are not particularly clear at the moment, and that is not helped by the absence of an RIA.
The figures in the Red Book are correct: £200 million in 2011-12, and £3.1 billion in 2012-13. They represent in-year yields from restricting tax relief to people with incomes of £150,000 or more on individual contributions and those made by their employers. The £200 million yield scored in the first year is due to restricting the relief for individuals with personal pensions through PAYE.
These are cautious estimates. We made reasonable adjustments for behaviour and for flexibility around how the measure is implemented, on which we said that we will consult. Of course, there is some uncertainty about precisely what the response will be.
The Ministers case would be strengthened if a bit more information were made available to members of the Committee about the revenue raised by the measure. We suddenly go from £200 million to £3.1 billion, and he refers to £2 billion. There needs to be a bit more clarity from the Government about how they achieved those figures so that we can be certain that they stand up to scrutiny. I would be happy if he wrote to us on that.
I do not think that I need to write to the hon. Gentleman. The estimate that I gave of £2 billion reflects a behavioural assumption that about 70,000 people would have made additional pension contributions in 2009-10 and 2010-11 in the absence of the anti-forestalling measure announced at the Budget. That estimate is based on some detailed modelling of taxpayer data on incomes and pension contributions.
To achieve the effect that I have described, the schedule introduces a special annual allowance. Those people with an annual income of £150,000 or more are able to receive relief at the marginal rate on whichever sum is higher of their normal regular pension savings or £20,000. The aim is to remove the advantage of increasing pension savings above the normal pattern. That advantage is removed by means of a special annual allowance charge, which will apply only if three conditions are met. The first is that the persons income is £150,000 or more; the second is that they increase their level of pension savings beyond their normal regular pension savings on or after 22 April 2009; and the third is that they make total annual pension contributions in excess of £20,000. That arrangement strikes a balance between protecting tax revenues, protecting normal contribution patterns and minimising burdens on industry.
The anti-forestalling legislation will affect only a very small proportion of people. We think that it is right that it should apply to those people with incomes of £150,000 or more. To be robust against avoidance, the definition captures those who have had incomes of more than £150,000 in this year or any of the previous two tax years. Otherwise, we do not need to affect people on annual incomes that are less than £150,000 at all.
As I have said, the schedule includes provisions to protect normal regular monthly or quarterly pension savings made under arrangements that were in place on Budget day. That applies equally to contributions made to money purchase schemes and defined-benefit schemes. Generally, protection will also apply to changes in pension contributions or benefits accruing that could occur due to events such as career progression, change of employment or early retirement. The special annual allowance has been set at £20,000, which we will have a debate about in a moment. That is to provide a reasonable balance for the groups affected, while retaining the overall aim that the interim regime should be cost-neutral. Setting the threshold for the special annual allowance any higher than £20,000 across the board would significantly raise the costs of these arrangements.
I thought that the Minister was about to come to an end. I just wanted to ask him one further question before he sat down. Can he confirm that the Governments projected borrowing assumptions take into account the revenue that will accrue from this measure in future years?
Yes I can. As I have said, the measure is part of the fiscal consolidation that is required. Also, I have now remembered the answer to the hon. Gentlemans earlier question. It is that 65 per cent. of tax relief on pensions goes to higher rate taxpayers.
We recognise that for some people with less regular contribution patternsthey have been mentioned in the debate already and we will come back to discuss them laterthe £20,000 special annual allowance represents a lower pension contribution than they have typically made in the last few years. That is why, in my written statement to the House on Budget day and in subsequent discussions with representative bodies, we have made it clear that we welcome views on whether there are ways of ensuring that those people with less regular contribution patterns can be protected in the interim regime while continuing to meet our objectives. In particular, it is important that the arrangements remain effective against the risk that forestalling behaviour will significantly increase the cost of pensions tax relief for the wealthiest people.
We are continuing to talk to industry and gather information about those people who are making non-regular contributions above £20,000 a year, to inform our position. I can tell the Committee that we shall return to this issue on Report if we conclude that action on it is necessary.
There is a regulation-making power here, so that we can, if required, make provisions for other forms of regular pension contributions to be protected. The anti-forestalling legislation also includes specific provisions to prevent avoidance. The regulation-making power means that we can react quickly if it becomes clear that people are taking advantage of the regime, but the power to tighten the rules can be used only prospectively, not retrospectively. There is also a power to amend the rate of tax, which we will use to amend the rate of the special annual allowance charge, following the implementation of the new 50 per cent. rate from 2011. The power is subject to the affirmative procedure, so the regulations will be available for debate in the House.
Coming back to the suggestion that we are discouraging pension savings, I do not think that that applies at all to people on modest incomes. Even those on high incomes who are affected will still benefit from higher rate tax relief on £20,000 of pension savings in a year, and will receive basic rate tax relief on the rest, so there are still good reasons for them to save in a pension. The hon. Member for Fareham read out a couple of quotes, so let me read a few back to him from the industry. David Millar of Friends Provident, one of the companies he referred to, has said:
Of our...members...only a very small percentage will even be touched by the change in legislation.
anyone with taxable income of up to about £180,000 in a year
will still find pensions more tax-attractive than other investments.
I look forward to the debate that we are about to have on some of the more detailed points, and I commend the clause to the Committee.
I can tell the Committee that I have had information from the Committee of Selection that the hon. Member for Burnley (Kitty Ussher) has been discharged from the Committee and will be replaced by the Exchequer Secretary to the Treasury, the hon. Member for Portsmouth, North (Sarah McCarthy-Fry). That change will take effect from this afternoons sitting.