Finance Bill

In the Budget, we announced a restriction of higher rate tax relief for the pension contributions of people with the highest incomes from April 2011. The House well understands why we had to introduce anti-forestalling rules in the meantime to protect an estimated £2 billion of tax that could have been at risk otherwise. The arrangements were designed to be fiscally neutral in the interim period between Budget day and April 2011. The principle that we adopted was to maintain higher-rate relief for continuing regular pension contributions over this interim period but to restrict the relief when contributions were additional to the regular pattern. We have defined regular contributions as those made quarterly or more frequently—an established pattern of pension savings where it is readily possible to identify the typical level of contributions. The level is also likely to be consistent, as part of a contract with an employer or with a pension scheme direct, so it is relatively easy to isolate forestalling as distinct from normal pension saving. It is harder to identify as "normal" contributions that are made less frequently, particularly when that requires looking back over previous years, not least because the A-day changes made three years ago have altered pension saving habits. Irregular contributors have a much more limited track record on which to base judgments on typical levels of contributions, and the payments tend to vary more in size. Many self-employed people and others, particularly those with personal pensions, make annual contributions or contribute on a more ad hoc basis as their circumstances allow, and we did not want to damage their interests. The regime includes an annual savings limit of £20,000 on which people are entitled to receive higher-rate relief. For some people—a relatively small group—£20,000 will be less than they have tended to contribute to their pension in the years since A-day. Incidentally, it will often be more than they could have contributed before A-day, but not since. In my written ministerial statement on Budget day and in our debate in Committee, I acknowledged that difficulty and made it clear that I wanted to consider how best to protect annual contributors alongside more frequent contributors, without risking large additional Exchequer losses. So we have Government amendments 48, 49 and 50, providing that if irregular contributions have been made over the past three years, the special annual allowance will be increased to the average of those contributions, but with an upper limit of £30,000. The approach in the Government amendments is similar to that in Opposition amendments 25 to 28, which likewise refer to average contributions from the past three years and would set an upper limit. I welcome the Opposition's support for that approach. The difference between us, not surprisingly, is what the limit should be. The Government amendments set it at £30,000 while the Opposition amendments suggest £50,000. The majority of people contributing on a non-regular basis had average contributions below the £20,000 level and so will be fully protected. Of those whose average contributions exceed that level, many are not far above it. We estimate that setting the limit at £30,000 will extend full protection to many annual contributors and to more than three quarters of all those affected. Only the highest quarter of contributors will be constrained at all, and they will see their limit for higher-rate pensions tax relief increased by half as much again, so they, too, will benefit. I suggest to the House that the £30,000 level is sensible and will bring the costs of the anti-forestalling regime down to an additional £70 million over the next two years—more than would have been the case without the relaxation, but an affordable level. Setting the level at £50,000, on the other hand, would raise costs by £130 million, nearly twice as much. The Opposition amendments would also potentially, though I imagine unintentionally, open a loophole for people with several pensions to have an annual limit of £50,000 on each. This is a difficult area, but I hope that Opposition Members will feel able not to press their amendments and to support ours instead. I wish to say a word about the other Opposition amendments, which have not yet been spoken to. On amendment 30, I have received representations on the subject of flexibility for those who change provider. I have thought about it, and I accept that we can be more flexible so that if somebody changes pension provider and carries forward exactly the same pension arrangements, they can retain their protected pension contributions. There is a risk, though, of inadvertently opening up significant avoidance. I would therefore like to take the matter forward through regulations, after consulting the industry on draft regulations. I accept the argument that lies behind the amendment, but I hope that on the understanding that I want to deliver that aim, the Opposition will not press it. One matter not covered by the amendments has been raised with me, which is that the rules on the commencement dates for the anti-forestalling regime are too stringent with regard to the treatment of those who set up new pension arrangements on or just before Budget day. There is scope there, too, to be helpful, and we will discuss the matter with providers and make any change necessary through regulations. If, as suggested in the Opposition's amendment 29, the income test applied only to the current tax year as opposed to the previous three, that would give people whose income is more than £150,000 a big incentive to reduce it below that level for the two years to which the anti-forestalling legislation will apply. People in that income bracket are often in a position to renegotiate their pay to delay taking income into a later tax year. Removing the three-year rule would put at risk a significant amount of tax revenue—we estimate that it could be £100 million in the two years to April 2011. It is important to bear it in mind that, for the majority of pension savers—98.5 per cent.—schedule 35 changes nothing. I hope that hon. Members will welcome the Government amendments and that Opposition Members will not be inclined to press their alternative amendments.