Pensions Industry still rattling about higher tax rate relief

By Calvin Allen

Four weeks on from the Budget, representatives of the pensions industry are still rattling on about the proposal to taper higher rate tax relief for those earning more than £150,000 such that, at £180,000, only standard rate tax relief is available.

It is an established principle of saving in a pension scheme that contributions are not taxed when you make them, whereas the pension you eventually receive is taxed as normal income. So, tax on that part of individuals’ income is essentially deferred from the point where it is earned to the point where it is actually received, as a means of rewarding responsible saving for retirement. Consequently, the bulk of the tax relief available goes to those who are higher rate tax payers: by itself, that’s not a particular problem given the principle that pension contributions involve essentially deferred taxation (that many higher rate tax payers in their working lives are likely to be standard rate tax payers in retirement is a slightly different point).

Criticism of the move to taper tax relief for those earning above £150,000 to the standard rate has been trenchant, and not only from within the pensions industry. Six criticisms have, essentially, been made:

– the principle under which pension contributions are made has been broken

– individuals could be paying tax on not just their own but also the contributions made by the employer on their behalf

– essentially this is the ‘thin end of the wedge’ under which all higher rate tax relief could eventually be lost

– that it adds additional complexity to pensions schemes that has defeated the objectives of HMRC’s 2006 pensions simplification

– that it (further) destabilises workplace provision on the grounds that those affected would lose all interest in providing workplace pension

– that it wouldn’t bring in the expected amount of revenue anyway.

Some of these criticisms can be dismissed as special pleading; in contrast, others appear, some rather superficially, to hold some water.

Firstly, the principle that pensions contributions represent deferred taxation will, indeed, be subverted by this change – but we have to decide as a society whether the means justify the ends. As Stephen Timms, Financial Secretary to the Treasury, pointed out in the Commons, those earning over £150,000 represent 1.5% of all tax payers but receive one-quarter of all the tax relief: that’s clearly a sizable imbalance that needs to be addressed from the perspective of tax justice.

Secondly, it is clear that the argument over individuals earning at this level paying tax relief on employer contributions made on their behalf applies only to the forestalling rules introduced from Budget Day to prevent people seeking to side-step the rules between now and 2011; it’s not a long-term change.

Thirdly, the notion that this represents the thin end of the wedge is, for me, the key criticism here. I would be arguing against the move if I thought that it was a precursor to a wider move in which higher rate tax payers lose tax relief at their marginal rate: many Connect members are themselves higher rate tax payers. I don’t know that it’s not part of a wider move – but I do believe that it is not: Stephen Timms’s statement looks to provide clear contextualisation for the move and it is clear that restricting tax relief in this way would not only damage what remains of workplace saving but, at the same time, is scarcely a vote winner.

Fourthly, my experience of pensions negotiations is that employers are capable of making schemes incredibly complex administratively and show no fear of doing so on behalf of a much greater number of people than are affected by this change. At the same time, Timms also, and rightly, commented that this same group of people has benefited disproportionately out of the 2006 pensions simplification project.

Fifthly, why executives seem to have lost interest in providing decent workplace pension saving schemes is open to conjecture, but it is surely more likely to be the result of a realisation of the cost to their companies in the short-term of such provision than their own individual positions. And there is an argument under which firms may well need – in somewhat happer times – to identify their pension schemes as a means of attracting and retaining the best talent. That still applies regardless of what is happening to tax relief at the most senior levels and surely only the most short-sighted of executives would allow individual position to blind them to the wider issues.

Sixthly, tax revenues may indeed fall – the creativity of the financial planning industry knows few bounds. But that’s a reason to curtail the loopholes which cause such revenues to fall, not one to counsel against the move being made in the first place.

It’s clear that more heat than light has been generated in the debate thus far – though that’s probably been largely the aim of those who have got involved. We know from the continuing furore over the restructuring of corporation tax in 1997 that, once a view gets out there, it becomes received wisdom in a very short space of time. Darling should stick to his guns on this issue, but that will demand a better articulation of the reasons why this is being done which takes head-on the criticisms being made.