The Special Annual Allowance and the Finance Bill
OK, and following on from the previous BeeLines on the rumoured change of the special annual allowance from £20,000 to £50,000 I thought it would be a good idea to lay out what happened in the debate last Thursday and where it has left things.
First things first. An amendment, number 198, was discussed as part of what’s known as the Committee Stage of the Finance Bill, but was withdrawn. At the end of this BeeLine we’ve included the full text of the debate from the point where amendment 198 was discussed to the point where it was withdrawn. It’s probably the misreading of this that set so many hares running last week.
The change proposed by amendment 198 from £20,000 to £50,000 was not made at the Committee Stage.
That doesn’t rule out changes that could still be made at the Report Stage, which comes after the Committee Stage and before the Third Reading, but my understanding is it would be up to the Treasury to bring in an amendment then and my reading of what Stephen Timms said last Thursday makes that seem unlikely.
Nevertheless we don’t know when the Report Stage is likely to be yet. The Committee is running hard to finish the Bill so all stages can be completed by the recess, so there’s a fair bet the Report Stage will be sometime before the middle of July.
25 June 2009
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Anyway, here’s the extract from the debate last Thursday:
Mr. Hoban: 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 Government’s 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.
Mr. Timms: 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.
Mr. Hoban: I am interested by the Minister’s 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.
Mr. Timms: The £750 million comes from the fact that under the hon. Gentleman’s 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 someone’s 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.
Mr. Hoban: 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.
Mr. Timms: 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.
Mr. Hoban: The point that emerges from the Financial Secretary’s 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 line—I hate to use the phrase—between 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.
Mr. Jeremy Browne: 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.
Mr. Hoban: I am not sure that I am making a compelling argument for the hon. Gentleman’s 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 Minister’s response to tackling this issue in the context of amendment 228, so I beg leave to withdraw amendment 198.
Source: Finance Bill Committee, 14th Sitting, 18 June 2009
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