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With this it will be convenient to discuss the following: amendment 199, in schedule 35, page 279, line 24, leave out £20,000 and insert £50,000.
Amendment 200, in schedule 35, page 279, line 25, leave out £20,000 and insert £50,000.
Amendment 201, in schedule 35, page 280, line 25, leave out £20,000 and insert £50,000.
As the Minister said in the debate on clause 71, setting to one side the issue of regular contributions, someone earning more than £150,000 a year will get full tax relief on contributions up to £20,000. The purpose of my amendments is to probe the Governments thinking about the level at which they set that threshold. I argue that the threshold should be increased to £50,000.
As I said in the previous debate, the A-day regime replaced a complex set of rules, and was meant to simplify them and make it easier for people to save in a more sensible way. One rule that was swept away was the cap on pension contributions. Prior to the changes, people who were under 50 could make pension contributions of 17.5 per cent. of their net relevant earnings. On that basis, someone earning £150,000 could make contributions of up to £26,000. For people over 51, the rate increased from 17.5 per cent. to 30 per cent., so that on an income of £150,000 they could make a maximum contribution of £45,000.
The Minister could have drawn inspiration from the pre A-day legislation to come up with a cap as a proportion of salary when that income exceeds £150,000 or a higher monetary cap to reflect those pre-existing rules. The cap is an important issue, because it will particularly affect those without the regular contribution pattern to which the Minister referred. I know that we will talk about that in some length in the debate on the group of amendments headed by amendment 228, but it is important to point out that the measure creates a distortion in the system, because if someone is earning £140,000 at the moment, they could make a contribution of, for example, £90,000 and gain relief at 40 per cent. on that contribution. That would be a generous relief, and is a consequence of how the measure is structured. However, a person with an income of £150,000 without a regular contributions record could be limited to receiving relief at the higher rate on £20,000. A mismatch has arisen, as people earning below the threshold will do quite nicely from the tax relief, but those above the threshold without a regular pattern of contributions will be limited to £20,000. One way in which the Government could deal with regular contributions and the application of the measure to people with an irregular contribution pattern, is to increase the annual allowance to create a much more flexible regime for those earning more than £150,000. With that in mind, I have tabled amendment 198 and the other amendments in the group.
We set the special annual allowance at £20,000, with very careful regard to typical levels of contributions, to provide a reasonable balance for those affected while retaining the overall aim, which is that the interim regime over a couple years should be revenue neutral. The special annual allowance introduced in the schedule strikes a balance between protecting tax revenues and normal contribution patterns and minimising burdens on pension providers. Individuals will receive relief at the marginal rate up to the higher limit of their normal regular pension savings and the special annual allowance of £20,000. Amendments 198 and 199 would increase the allowance from £20,000 to £50,000 across the board. They would significantly increase the generosity of the regime and would not be well targeted. The cost of providing relief to those on the very highest incomes would be increased, costing around £750 million over the two years.
I am interested by the Ministers comment about the cost of increasing the threshold from £20,000 to £50,000 and the fact it is £750 million out of a £2 billion estimate. There is a need for clarity because, when looking at the cost, the Committee would be interested to know what element of the revenue raised by the measure comes from capping regular contributions and what element comes from the £20,000 cap. We do not have any clarity on how the measure will bite in practice.
The £750 million comes from the fact that under the hon. Gentlemans amendment, many people earning £150,000 or more would be able to contribute substantially more to their pensions over the next couple of years than they would have expected. They will thereby benefit from full higher rate relief, which will not be available from 2011. There are clearly some assumptions there about how people will behave, but we are certainly talking about a substantial increase in the cost of those arrangements if the cap was lifted in that way. £20,000 has been set, so that the arrangements are pretty much revenue neutral, and there will be a small cost of £20 million over the two years from setting the cap at that level.
Amendments 200 and 201 would alter the amount of someones pension contribution that can be deducted in calculating whether their income is above £150,000, raising it from £20,000 to £50,000. That would be very expensive and open further opportunities for avoidance. Were the amendments to be made, anyone with gross income of up to £200,000 would be able to make pension contributions of between £50,000 and £245,000, because their taxable income would have been reduced to below £150,000. Amending the definition of income as proposed would be costly. Adopting a more generous definition of taxable income allowing for £50,000 deductions in the form of contributions alongside a special annual allowance of £50,000 would have a total cost for both measures, we estimate, of £800 million. I do not see the justification for increasing relief in that way for the best-off people in the country by such a large extent.
Does the Financial Secretary not accept my point about the differential effect that that will have on people on either side of the boundary line for income? Someone earning £140,000 could make a £90,000 contribution and receive 40 per cent. tax relief, but someone earning more than £150,000 who has not had a regular pattern of contributions would only receive relief at 40 per cent. on £20,000 of contributions. There is a mismatch arising from the way in which the £150,000 limit has been introduced.
I am not really sure that there is a mismatch, because a person earning £140,000 will continue to be able to enjoy full higher-rate relief from 2011 onwards. We are trying to ensure that those who will be affected by the arrangement from 2011 are not in a position to be able to forestall, and that is what the arrangements effectively address. Given that explanation, I hope that the hon. Gentleman will be able to withdraw those costly amendments.
The point that emerges from the Financial Secretarys remarks is not so much the cost but the crude way in which the measure will impact on people. Someone earning less than £150,000 could potentially enjoy more tax relief than someone earning £150,000 who does not have a regular pattern of contributions. There is a clear dividing lineI hate to use the phrasebetween those just under the threshold and those just over it, with regard to what they are able to claim in tax relief. Someone who does not have a regular pattern of contributions will be disadvantaged, but someone earning £150,000 with regular contributions of £30,000 could enjoy the full relief. If they do not have a regular pattern of contributions, full tax relief will be limited to £20,000. A problem is emerging, partly as a consequence of the treatment of regular contributions.
Does the hon. Gentleman accept that he is making a compelling argument for the case that I made? If everyone enjoyed pension relief at the basic rate, there would be no threshold and no anomaly. Not only would lots of extra revenue be available to have a more economically efficient and socially just country, but we would get rid of all the anomalies he is so concerned about.
I am not sure that I am making a compelling argument for the hon. Gentlemans proposals, but then I did not think that he made a compelling argument himself in the stand part debate. However, I will let that one pass by. Some people, because of the hard threshold of £150,000, will not enjoy the same pension tax relief as people earning a slightly lower salary. That perhaps goes back to the issue of a regular contribution pattern to which the Financial Secretary has referred and which we might address later. My amendment would soften the blow of regular contributions and the issues surrounding them. It may not be the most effective way of doing so, but it is a suggestion about how to tackle the matter. However, I am much more interested in the Ministers response to tackling this issue in the context of amendment 228, so I beg leave to withdraw amendment 198.
With this it will be convenient to discuss the following: amendment 203, in schedule 35, page 280, line 39, leave out sub-paragraph (2).
Amendment 204, in schedule 35, page 291, line 7, at end insert
but this Schedule shall not apply where the individual concerned is aged 50 or over at some time in the tax years 2009-10 and 2010-11..
The amendments deal with a different aspect of the rules. Paragraph 2 of the schedule sets out how to calculate the relevant income to determine how the 20 per cent. charge will be levied. In essence, it is a very broadly based definition of income. In paragraph 2(2), we learn that relevant income calculation applies not only to the tax year in question but to the tax year before that and the one before that. If someone was earning £30,000 a year, but had had a temporary boost in their earnings two years ago from, say, the sale of a business, he would be subject to the restrictions in these measures. This provision, therefore, captures people whom the Government might not necessarily want to catch.
Let me give some other examples. A businessman might have sold his business and had a one-off boost to income. We know that as a consequence of the recession a number of people have been made redundant. Someone could have been made redundant in 2008-09 and received a very generous package which could well have taken him into the £150,000-plus bracket. He may find another job in 2009-10 that pays £40,000, but decides that because he is now in employment he will use some of that redundancy package to top up his pension. He might make a £40,000 contribution. Because he has earned more than £150,000 in the past, there will be a restriction on the tax relief he earns, even though he may now be a basic rate taxpayer. He could have earned a bit moresay £60,000 or £70,000and be a higher rate taxpayer, receiving relief at 40 per cent.
As a result of a one-off change in his income a couple of years ago, that person has to face a restriction on the tax relief that he will get from topping up his pension fund. That is part of the pitfall that comes from having a charge that is based on past earnings contributions rather than something that looks forward. Again, this is where the iniquity of the £150,000 limit comes in. Someone whose earnings have fallen from £150,000 to £80,000 would lose tax relief, whereas someone whose earnings were £149,000 and fell to £80,000 would not, and that does not seem right. We must think very carefully about whether the scope for manipulation of income and pension contributions is sufficient to justify punishing those people who would be entitled to relief now but will not benefit from it because of a fluctuation in their income several years ago. Amendments 202 and 203 will address that issue by removing all references to previous tax years so that a person is only judged on their income for this tax year and not for their income in previous tax years.
Amendment 204 concerns the effects of these measures on people approaching retirement. There is a tendency for people who are approaching retirement to focus a bit more on their future pension provision, and to think about making larger contributions. They have perhaps paid off their mortgage and have some more spare income. Their interests, and how they spend their money, might change, and they might begin to focus more on their upcoming retirement. They might therefore want to contribute more to their pension pot. They might want to achieve a particular level of income, so the later they start, the higher their contributions will have to be. The loss of the higher rate relief might well restrict their ability to save adequately for retirement. Furthermore, the sporadic nature of the income of someone with a small business might make it difficult for them to save earlier in their lives.
Amendment 204 would assist people approaching retirement by enabling them to top up their pension pot more flexibly. It is a fairly crude amendment, and doubtless the Minister will tell me just how much it will cost, but it raises a legitimate concern that we need to bear in mind. If he accepts my argument, perhaps we can return to it on Report to find other ways of providing for more flexibility in the system to help people approaching retirement who feel the need to top up their pension pots by significant amounts. That could ensure that they have a decent income on which to live and prevent their having to fall back on the state.
People in the income bracket that we are talking about are very often in a position to renegotiate their pay packages or delay the taking of income into a later tax year. That is why the schedule includes the three-year income rule. Otherwise, there would be a fairly open invitation to people to change their income and so avoid the provisions.
On the point about people receiving big redundancy payments, I should point out that the first £30,000 of any payment would not count towards income as calculated in the schedule. Even if a payment is more than £30,000 and takes the person into the £150,000-plus bracket, they will be affected by the special annual allowance charge if they make additional, non-regular pensions savings, and only then if the total savings are more than £20,000 in the year concerned. However, average total pension contributions by people in that position will be less than £20,000.
It is important to bear in mind that, for the majority of pension savers, schedule 35 changes nothing. They will still benefit from generous tax relief on their pension savings. Without the rules that we are putting in place, forestalling is more likely to be undertaken by people over 50, because they are more likely to have access to the ready cash required. They would not have to wait so long to retain the tax-free lump sum. I therefore urge the hon. Gentleman not to press amendment 204, because it would be an invitation to avoidance. Of those with an income of £150,000 or more, it is likely that many are aged over 50 and will have access to the most spare cash.
On the point about people selling a business, I can reassure the hon. Gentleman that capital gains are not included in the definition of income in the schedule. I hope that that is reassuring. He also invited me to tell him how much his amendment would cost. It would cost £300 million this year, £700 million next year and £1 billion altogether.
I am grateful to the Minister for providing the costs at the tail end of his speech. I knew that they would come in due course. The Minister made clear the Governments starting point, which is to minimise any tax leakage. That is the clear thrust of the measure. A balance needs to be struck, but my concern is that, in the Governments desire to minimise tax leakage, there is a risk that they will overlook