CIOT: Pensions tax relief restrictions will significantly increase employer burdens

CIOT: Pensions tax relief restrictions will significantly increase employer burdens

CIOT: Pensions tax relief restrictions will significantly increase employer burdens

The Chartered Institute of Taxation (CIOT) has expressed disappointment that the Government intends to press ahead with its proposals to introduce restrictions on pensions tax relief for higher earners from 6 April 2011.1

The Government set out its proposals in a lengthy consultative document issued at the time of the Pre-Budget Report in December2. The consultation period ended on 3 March and the Government confirmed in the Budget last week that it intends to legislate along the lines originally proposed. This is despite warnings from the CIOT3 and pensions industry bodies that this will cause a significant increase in administrative burdens for everyone concerned (including HMRC), and that the Government’s underlying policy objective could be achieved in other ways.

Colin Ben-Nathan, Chairman of the CIOT’s Employment Taxes Sub-Committee, said:

“The Government’s proposed method of restricting tax relief will cause disproportionate complexity and an increase in the costs for employers, pensions scheme and the pensions industry as a whole.4

“Even the Government’s own figures indicate that the compliance cost on business will be in the region of £1 billion in the scheme’s first year alone.5

“It is disappointing that, having identified the magnitude of the cost to business, the Government is nevertheless continuing with its proposals virtually unchanged. This is particularly so at a time when there is a real need for business and the public sector alike to streamline process, eliminate administrative complexity and focus on service delivery.

“The CIOT is, even at this stage, calling on the Government to consult further with stakeholders to determine whether its policy objectives can be achieved by adopting a more straightforward approach.

“If the objective is to reduce the tax relief the wealthy receive on pension contributions, we think that a simpler way to achieve this would be to restrict the maximum amount (annual allowance) you can put into registered pension schemes each year. In this respect, we have suggested a reduction from the level of £255,000, which the Government intend should apply from 6 April 2011, to approximately £50,000.6

“In our view the Government’s current proposals involve such administrative complexity as to make them virtually unworkable.”

Notes

1) Under the Government’s proposals people with incomes of £150,000 to £180,000 will see income tax relief on their pension contributions tapered from 50% to 20%. Those on £180,000 or more will have relief restricted to 20%. Relief on pension contributions made by an individual’s employer will also be restricted – by way of a special tax recovery charge imposed on the individual; it will be mandatory for the scheme to meet this tax charge at the individual’s request, subject to certain conditions, including a de minimis amount, by reducing the member’s accrued benefits or money purchase pot.

2) HM Treasury/HM Revenue & Customs consultation: Implementing the restriction of pensions tax relief (December 2009) (http://www.hm-treasury.gov.uk/d/pbr09_consult_pensions.pdf)

3) The CIOT’s letter to HM Treasury of 12 October and response to the HMT consultation paper can be viewed at: http://www.tax.org.uk/attach.pl/9042/10701/ImplementingRestrictionsPensionsTaxRelief%20final050310.pdf.

4) The legislation will impose an obligation on employers to provide information to employees within three months of their being asked to do so. For defined benefit pension schemes the scheme administrator will have to carry out a complicated calculation to establish a notional contribution. However, in order for the scheme to undertake the calculation it will need to receive information from the employer on pensionable pay and service within a reasonable time. It is proposed that the restrictions on relief apply equally to those who are members of tax privileged overseas plans which will cause further complexity, not least in being able to obtain the relevant information from the overseas administrator. The additional tax costs involved are also likely to act as a further barrier to international groups of companies wanting to do business in the UK, as opposed to other less costly jurisdictions.

5) Source: HM Treasury/HM Revenue & Customs Impact Assessments March 2010 (http://www.hm-treasury.gov.uk/d/budget2010_impactassessments.pdf) – “Ongoing compliance costs for pension schemes, employers and individuals are estimated at £115m for average annual (recurring) costs, and £900m for one-off costs.”

6) This is set out in the CIOT’s response to the HMT consultation paper at: http://www.tax.org.uk/attach.pl/9042/10701/ImplementingRestrictionsPensionsTaxRelief%20final050310.pdf.

Additional Note

The Chartered Institute of Taxation (CIOT) is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.

The CIOT’s comments and recommendations on tax issues are made solely in order to achieve its primary purpose: it is politically neutral in its work. The CIOT will seek to draw on its members’ experience in private practice, government, commerce and industry and academia to argue and explain how public policy objectives (to the extent that these are clearly stated or can be discerned) can most effectively be achieved.

The CIOT’s 15,000 members have the practising title of ‘Chartered Tax Adviser’.

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