Clause 11 - Exemption from income tax of contributions to pension schemes

Finance Bill – in a Public Bill Committee am 2:45 pm ar 16 Mai 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 2:45, 16 Mai 2013

I beg to move amendment 16, in clause 11, page 6, line 16, at end add—

‘(3) The Chancellor of the Exchequer shall within 12 months of the passing of this Act, provide a report to Parliament on the impact of these provisions including on, but not limited to—

(a) death-in-service schemes;

(b) other death benefits;

(c) non-working spouses without independent pensions provisions.’.

Photo of Sir David Amess Sir David Amess Ceidwadwyr, Southend West

With this it will be convenient to discuss the following:

Clause 11 stand part.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I say at the outset that we have tabled this as a probing amendment, because we wish to raise a number of questions about the possible unintended consequences of the Government’s proposals.

The clause relates to employer contributions to registered pension schemes and addresses what was seen as potential tax avoidance, where an employer made a contribution to a pension arrangement for an executive’s or employee’s spouse or dependant. The effect of those arrangements was to allow an employer to provide retirement funding for a family member tax efficiently, as it has been described. The employer contribution was not treated as a benefit in kind for the employee and was exempt from income tax and national insurance.

The provisions in the clause would mean that an employer contribution to a registered pension scheme will now be exempt from income tax only if it is in respect of the employee. Contributions to a spouse’s or dependant’s pension will not be exempt from an income tax charge on the employee. I want to probe some of the concerns that have been raised about consequences, perhaps unintended, of the provisions.

We tabled the amendment to give the Minister the opportunity to clarify and, if necessary, to think further about the issues, and I want to take a few moments to develop some of the themes that concern us.

First is the provisions’ impact on non-working spouses. Pensions have become a concern to us all as the population ages and budgets tighten. People up and down the country are worried about how they will support themselves in retirement. The Government are implementing the flat-rate state pension—it has several issues, but this is not the place to go into them in detail—but many people are finding the changes difficult to understand. Pensions are always a complex matter and people want clarity on what is ahead.

Companies have been providing spouse’s pensions for many years, including both widow’s and widower’s pensions. For example, the civil service pension scheme and MPs’ and Ministers’ pension schemes provide pensions for spouses who may never work for the civil service or sit in Parliament. An individual has an annual allowance for the amount of pension savings that benefit from tax relief in a registered pension scheme or overseas equivalent. That allowance is currently set at £50,000 and will be reduced to £40,000 from 6 April 2014 following the provisions set out in clause 48. In addition, if the annual allowance relating to the previous three tax years has not been used, either partly or fully, my understanding is that it can be carried forward to add to the current year’s annual allowance, provided that the individual has been a member of a registered pension scheme during the earlier tax years.

In theory—I am by no means an expert, so I am looking to Minister to get information to us if he is not able to give it today—the carry-forward rule gave an opportunity to make a contribution of up to £200,000 for the spouse, civil partner or other family member, although I understand that that rarely happens in practice. The tax benefits of the arrangement were that the contribution to the spouse or dependant’s pension did not count toward the employee’s annual allowance and neither was it taxable on the employee, spouse or family member. It was also deductible by the employer for corporation tax purposes. I hope people are bearing with me as I go through the technicalities.

Once the contribution was made, the normal rules applied, so that when the pension was accessed, there would be, on the whole, a 25% tax-free lump sum and the balance of the pension income would be taxed at the marginal rate. However, that worked only if the spouse was not already using his or her annual allowance with pension savings of their own. Hence it automatically cut out any benefit when both husband and wife are working and building up their own pensions. My understanding is that the current legislation does allow people without earnings to pay up to £3,600 into a personal pension scheme each year, but there is no carry-forward provision. When people may live, for example, for 30 years into retirement, a fund of £3,600 would be equivalent to providing a pension of only £120 a year or £2.30 a week for those 30 years. I am sure that Minister would agree that that seems a very low amount.

The Government have stated that the intention behind clause 11 is to protect against attempts to sidestep the annual allowance limit, which we absolutely understand. However, the concern is that the measure would, in reality, additionally target pension provisions not for rich spouses trying to seek tax relief for their partners, but rather those spouses who do not have generous pensions and who therefore understandably welcomed an opportunity to build up their own, perhaps relatively small, pension pot. Our concern is that the measure targets not only the spouses of, for example, City fat cats, but also many middle-income earners and their spouses, for whom the ability to build up that pension and to secure a decent and worry-free retirement remains a real concern. The non-working spouses affected are those women who may not have worked in a paid job through some or all of their adult life, but instead undertook years of unpaid valuable family or caring  responsibilities. Precisely because they have not been able to work, they have been unable to build up a pension pot of their own.

I understand the Government’s desire to make savings in these tough times. We hear constantly about the restriction in retirement savings going some way towards helping the Treasury reduce budgets. I do not want to open up a whole debate at this stage on other measures, but these measures sit alongside others in the Bill that once again reduce the annual and lifetime limits on pension savings. All three measures together may be seen by many to be discouraging retirement savings at the exact time when we need to be encouraging people to ensure that they can provide for themselves in the future.

We on the Opposition Benches understand the Government’s desire to make savings and to protect against people trying unreasonably to sidestep set allowance limits, but will the Minister commit to reviewing the measures’ impact on the pensions of non-working spouses? That review would ensure that we are not storing up problems for the future or leaving non-working spouses unfairly less well off in their retirement compared with spouses who have undertaken paid work during their lifetime.

It would be helpful to know whether the Minister has given some thought to our points. For example, has he undertaken an assessment of the measure’s impact on those affected, including an assessment broken down by income group? Has he undertaken an assessment of the cumulative impact of this and other measures in the Bill to reduce the annual and lifetime limits of the pension savings of those affected?

We have asked in our amendment for a review of the clause’s impact on other arrangements, such as death benefits and death in service schemes. It has been unclear to us and others, including the Chartered Institute of Taxation—I understand it has made some comments on this—whether such arrangements are covered by the clause. As we know, the clause provides that there will be no tax charge on an employee for an employer pension contribution, provided the contribution is in respect of the employee. I mentioned that at the outset, but with death benefits and death-in-service schemes the former employee will by definition not receive any pension benefits from the former employer’s contributions. It is therefore unclear whether such arrangements will be included within the scope of the provisions. Will the Minister clarify whether that is an issue of drafting or an issue of the Government’s intent?

If we do not have clarity, the concern is that it will be left to the discretion of officials, such as those at HMRC, as to which arrangements are covered by the provision. I genuinely do not think that the Minister is looking to do that; I am sure he would be looking to have as much clarity as possible. Can he clarify whether he intended such arrangements to be covered by the provision? If so, what assessment has he made of the number of individuals who will be affected and what will the cost be to them? If he did not intend those arrangements to be included, what action will he take to ensure that there is clarity, both for HMRC and for those individuals who may be affected? I hope he will hear the comments that have been made.

If the Minister can put some assurances on the record about his intentions, how he wants to take the proposal forward and whether there is any need to look again at the drafting, we will hopefully not need to press the amendment to a vote. As I said at the outset, it is a probing amendment, designed to raise issues and get clarity for those who are likely to be affected. I hope that the Minister will respond to those points and give us the assurances we need.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury 3:00, 16 Mai 2013

Clause 11 restricts employees’ exemption from income tax and national insurance on pension contributions made by their employer to a registered pension scheme. Before I turn to the amendment tabled by the hon. Member for Kilmarnock and Loudoun it would probably be helpful for me to provide some background to the clause.

Contributions to registered pension schemes are subject to an annual allowance which limits the total amount of tax relief an individual can benefit from. This includes employer contributions. The Finance Act 2012 reduced the annual allowance from £255,000 to £50,000 from April 2011. We will be considering a further reduction to £40,000 under a later clause. As a consequence of the 2011-12 reduction, many employers restricted the overall value of total contributions into the employees’ pension scheme to the amount of the new limit. However, certain arrangements paid excess contributions into a family member’s pension scheme instead of the employee’s own in an attempt to sidestep the reduction in the annual allowance. This is not fair.

In the face of such arrangements the clause ensures that the exemption from income tax and national insurance for employer contributions to a registered pension scheme will be limited to contributions made by an employer in respect of their own employees. The effect of the clause is that an employee will become liable to both tax and national insurance on the value of the pension contributions their employer pays in relation to members of the employee’s family or household. However, I can assure the Committee that it will not affect the exemption for employer contributions paid to the employee’s own arrangements under a registered pension scheme.

Restricting the exemption in this way also removes unintended scope for the employee and a member of his or her family both to benefit from income tax relief on the same employer contributions. This clause will not affect the relief available to the spouse or family member, whether contributions into their scheme are paid by the employee, the employee’s employer or by other persons.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I want to refer specifically to a point raised by the Chartered Institute of Taxation. In its submission it asked:

“if the employee’s pension arrangement includes provision for the employee’s spouse or other family member (eg in the event of the employee’s death) would that mean that part of the employer’s contribution is not ‘in respect of the employee’?”

It would be helpful if the Minister could get some clarification on that at some point.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

I will try to clarify that now. The death benefit rights are building up by the reason of the service of the employee, whether or not the employee lives to receive the pension and the lump sum directly.  Employees also benefit from knowing that their dependants will be provided for by their pension scheme after their death. Therefore there is no doubt that legally the employer pension contributions are being paid in respect of the employee. This treatment is consistent with the wider tax framework for the registered pension schemes and HMRC guidance will be published to confirm this point.

Turning to amendment 16, the Government fully support the need to make the best possible assessment of the impacts of changes to the tax regime, but believe that this amendment is unnecessary. As I said earlier, the clause will not affect the income tax treatment of employer contributions paid to an employee’s registered pension scheme. This includes where the contributions are or may be used to provide death in service benefits or a pension for dependants after the employee has died. HMRC guidance will shortly be published on this. This clause also does nothing to prevent anyone from paying contributions into a registered pension scheme on behalf of any individual. As already mentioned, the clause does not affect the tax relief that is available for individuals on whose behalf pension contributions have been made, whether or not they have taxable earnings.

What the clause does do is ensure that that tax treatment of pension contributions made on behalf of an individual will be the same as if the money was given to them out of taxed income and then paid into their pension scheme as a contribution. The clause therefore provides fairer tax treatment, ensuring that affluent individuals cannot obtain unfair tax advantages through arrangements designed to undermine the annual allowance set by the Government.

The hon. Lady understandably raised the potential impact on non-working spouses. The tax framework already provides a widely-used facility for individuals with no taxable income to enjoy tax relief on contributions made by them, or by someone else on their behalf, into a personal pension scheme. Currently, an individual with no taxable earnings may put up to £2,880 into their pension, which would be topped up by the Government to £3,600 and that will continue to apply—[Interruption.] I am not sure what has happened to my officials. Perhaps someone scared them off—I wonder what I said?

If I may conclude before anyone asks me another question, it is not appropriate that the annual allowance limit can be undermined in that way, nor that the multiple relief should be available for the same pension contributions. I therefore ask that the amendment be withdrawn.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I was frantically trying to think of something very difficult to ask the Minister at the point at which he was not able to get the normal inspiration, but, in the hope that we might make some progress, I resisted that temptation. It was helpful to hear the Minister’s response to the specific points that we raised. As I said at the outset, I was hoping to get some assurances from him that he was alive to the issues we were raising, he understood the concerns and he would keep the matter under review so that we would not need to press for a vote. Indeed, he did give clarification on those issues and some assurances; I am sure that he will continue to give assurances on this issue throughout the course of the Bill.

I do not want in any way to undermine efforts to discourage people from side-stepping, or trying to avoid, paying what is due; I simply want to ensure that there are no unintended consequences that could impact on those trying to do the right thing, particularly those on lower and middle incomes and, particularly, women who have not been in the employment market for the period necessary to build up a decent pension pot. In light of the Minister’s comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 11 ordered to stand part of the Bill.