Finance Bill

Lord Davies of Brixton Excerpts

2nd reading & Committee negatived & 3rd reading
Wednesday 21st February 2024 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, the Finance Bill gives us a chance to raise issues which others may regard as hobby horses but which I think are important topical, technical matters that are worth drawing to the Minister’s attention. I have two issues on my agenda. The first is the implications for recipients of the state pension of the Government’s policy of freezing income tax personal allowances and the second is the taxation of pension benefits following the abolition of the lifetime allowance.

Those with a very long memory will be aware that there is something called the Rooker-Wise amendment, “Rooker” being my noble friend Lord Rooker. Back in 1977, it was laid down for the first time in legislation that the personal allowance should be increased each year in line with inflation. I think that, technically, that is still in force, but successive Governments, including this Government, have opted out, through Finance Bills, of that requirement to index-link. My understanding —and I ask the Minister for confirmation—is that the freeze, which is now proposed to go up to 2027-28, was provided for in last year’s Finance Act and so there is no need for it to appear again in this Bill. Does that imply that the Government have given up on rolling forward the period for which the personal allowance will be frozen? It is shorter this year than last year. Is that a clear statement of policy or has it just been left out? We cannot forecast the Budget. Will we be told? Perhaps we will if it is not in the Budget and not in purdah. Does the freezing last only until the year that we were told it would be or is it going to be rolled forward another year?

That is very pertinent to the main point that I want to raise, which is the impact of freezing the personal allowance on pensioners, particularly those dependent mainly on the state pension. As we know, the state pension is being increased in line with the triple lock, to which all parties are currently committed, so it goes up by inflation, earnings or 2.5%, whereas the personal allowance is frozen. The new state pension is rapidly catching up with the personal allowance. My figures, based on estimates by the Office for Budget Responsibility, are that the new state pension will catch up with the personal allowance by 2027-28 and that in the following year, 2028-29, it will exceed the personal allowance.

The practical problem is that pensions are not part of the PAYE system. Where people receive a state pension—many pensioners receive a state pension that is greater than the new state pension because they have retained rights from the previous scheme—they will owe tax but are not part of the tax system. Instead, at the beginning of the following year they get a brown envelope in the post saying, “You owe us some money”. That is going to become more and more frequent as the state pension increases but the personal allowance is frozen.

I want the Government to say they are fully aware of this problem and are on the case. The obvious answer is that the state pension ought to be brought within the remit of the PAYE system so that people pay the taxes due over the year, as people do out of their earnings. However, I have not yet heard the Government say either that they understand the issue that is coming down the road or that they are going to do anything about it.

I emphasise that the hardest hit will be those earning income entirely from the state pension—maybe they do not have any other income or it is very small—that is slightly larger than the new state pension. We are talking £15,000 a year, which is not exactly riches. That is over £2,000 more than the personal allowance so they will be liable for 20% tax on that £2,000, which is £400. Someone on £15,000 a year is going to get a request for £400, to be paid as a lump sum. That is untenable. It will be a crisis when it arrives, and I just hope the Government can get ahead of the issue.

I turn to pensions taxation. Clause 14 and Schedule 9 deal with the abolition of the lifetime allowance charge. The Financial Secretary said in the Commons, when introducing the Bill, that this was intended as part of a policy to

“remove both barriers to work and incentives not to work”.—[Official Report, Commons, 13/12/23; col. 925.]

Those remarks were echoed by the Minister in this House. Indeed, the OBR estimated that the abolition of the lifetime allowance would mean there would be 15,000 more people in work, not least in the medical profession. That is an estimate based on behavioural change so we have to be a bit sceptical, but still it will have had an impact.

However, the Government have been too quick to congratulate themselves on solving the problem of pension taxation on highly skilled professionals, given the extent to which they will still be leaving their jobs because of the impact of the pension tax system. In my view, the annual allowance has always been the bigger problem. Particularly when someone is at work, the annual allowance means that early the following year they get another brown envelope relating to a significantly larger sum of money, saying, in some cases, “You owe a sum in excess of £100,000”. That is not unknown, so this is a serious issue. The Government may think they have addressed that because they have increased the annual allowance from £40,000 to £60,000, but still on £60,000 there will be highly paid, sorely needed professionals who will get a tax charge the following year.

That is not even the biggest problem. There are two further immediate problems. First, there is the taper. This is not the venue to start explaining the technical details of pension taxation, but the taper withdraws the relief available on the annual allowance as incomes increase. It is a classic case of something that those familiar with how taxation works will know: when you remove a taper, you get very high marginal rates. There is a taper on the tax payable after allowing for the annual allowance. The taper is still there, and some professionals argue that that is actually what is driving them out of employment.

There is a second issue that needs to be addressed. The rules have changed. You are taxed on the growth of your pension in a pension scheme. If you have two schemes, under the previous rules each pension scheme was taken separately. If you happened to be in an old pension scheme, which many doctors were, as well as in a new pension scheme because of all the changes that were made to pensions in 2015, you could have a declining value of a pension in one scheme but an increase in the value of the pension in the other. Overall, you would not really have gained much at all, but you were still taxed on the increase in the one scheme even though you were not getting any extra pension.

The Government addressed that, so you were allowed to combine your schemes from the same employer, but there is an issue they have not addressed: if your pension went down last year, you get no credit for that if your pension goes up the following year. So over a two-year period there might be no change in your pension, but you still have to pay tax on the value of the increase of that pension the following year.

Those are the two issues that I have taken the opportunity to draw to the attention of the Minister: the taper and the taxation of negative pensions growth.