Lords Critical of UK Government’s Pension Tax Changes

A UK parliamentary committee has warned that changes to the pension tax system for high earners will likely damage the country’s reputation in the international competition for business talent.

In an examination of certain proposals announced by Chancellor Alistair Darling in the 2009 budget, the House of Lords Committee on Economic Affairs concluded that government officials have been “over optimistic” in their assessment of the impact the pension tax changes will have.

“As was put to us by our private sector witnesses, the people affected are likely to be the opinion formers in the business world and an adverse impact on them, particularly when coupled with the change in the highest rate of income tax, may well produce upward pressure on the cost of employing highly paid talent,” the committee’s reports cautioned, adding that: “This could have knock-on consequences over a much wider range of people.”

The report recommended that the effect of these changes should be “carefully monitored” and kept under review to establish their impact on UK competitiveness.

The government’s lack of consultation on aspects of the proposed pension tax legislation has also been criticized, particularly the ‘anti-forestalling’ schedule, which seeks to prevent individuals from entering into transactions that will mitigate the impact of the tax increase before they become effective next April.

"On the face of it you might say that there should not have been consultation on an anti-forestalling measure, but I think we are in a different league here,” commented Frank Haskew of the Institute of Chartered Accountants in England and Wales in giving evidence to the committee. “This is a fundamental change to a pension regime and it is such a fundamental policy shift that I think we feel that there should have been consultation on the proposal with a view to it coming in at some future date and that really there should not have been anti-forestalling rules of this nature introduced at this time."

David Richardson, senior HM Revenue and Customs official, responded that it would have been “extremely difficult and largely self-defeating” to consult on the anti-forestalling provisions, which are already a part of the 2009 Finance Bill.

Mark Neale, a Treasury official, added: "as you will know, we do not consult about everything in advance of a budget. We tend not to consult about changes to tax rates or to consult about measures which could be subject to forestalling."

Whilst accepting that consulting on the anti-forestalling rules would have been “very difficult,” the Lords report nonetheless urged the government to consult as widely as possible when attempting to change the law.

“Informal consultation is partial, not acceptable to those not involved and can put those involved in a difficult position,” the report stated. “In last year's report we recommended ‘that consultation should be even-handed and open, involving as many as possible of the professional bodies and other parties which have a valid interest.’ We hold to that view.”

The proposed changes would restrict pension contributions for those who receive a total annual income of GBP150,000 or more to basic rate (20%) tax relief. The proposals are scheduled to be introduced in April 2011, but the anti-forestalling rules designed to prevent effective tax planning in the meantime could see the start date brought forward to April 22, 2009 for many taxpayers. The changes will mean that someone earning GBP200,000 per year and contributing 6% of their income into a company pension scheme will lose out to the tune of GBP2,400 annually.

The government expects the withdrawal of higher rate tax relief on pensions to raise about GBP3bn (USD4.65bn) in additional revenues, but the measure will affect only a relatively small number of taxpayers (less than 300,000), many of whom are expected to find ways to avoid the extra tax.