Taxation of Pensions Bill

Debate between Tom Blenkinsop and Andrew Love

Wednesday 29th October 2014 Commons Chamber

[Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)]

As has been mentioned, I am a member of the Pension Schemes Bill Committee, as are a number of colleagues who are present today. We are here to find out about the technical elements that will affect that Bill, because some taxation issues have been brought to our attention during the Committee’s evidence sessions. I want to refer to the evidence given by Mr John Greenwood, who is editor of Corporate Adviser magazine—it is given out to pension professionals—author of the “Financial Times Guide to Pensions and Wealth in Retirement” and a freelance journalist for national newspapers.

The issue emerged between May and July this year and concerns how individuals can avoid national insurance contributions by using the Government’s newly announced scheme to divert their income through a pension fund, rather than receiving it in a traditional salary. I will dip in and out of the evidence Mr Greenwood gave during the Committee’s fourth sitting, on Thursday 23 October, because I think that it is pertinent to the Pension Schemes Bill Committee’s considerations and to the debate on the Taxation of Pensions Bill, both here and in Committee. Mr Greenwood, elaborating on his concerns, told the Pension Schemes Bill Committee:

“The new easy access rules create a huge risk of widespread tax avoidance. If everyone over 55 takes full advantage of them, the Treasury could lose £20 billion in 2015-16—obviously, that is a massive number. That will not happen, but if even a tenth of people do, that is still a £2 billion loss. That seems to make quite a hole in the Treasury’s optimistic projection of making £3 billion of profit out of the policy over the five years of the next Parliament.”––[Official Report, Pension Schemes Public Bill Committee, 23 October 2014; c. 117, Q249.]

The Financial Secretary said earlier that the Treasury had not yet given a forecast of how much it expects to make or lose on this policy, but we already know from Mr Greenwood’s inquiries that the Treasury had initially estimated a £3 billion profit. I think that is pertinent to today’s debate, because it is about the tax implications of the legislation and how they will affect the autumn statement, the Budget and what a future Government will be able to plan for with regard to incomings and outgoings.

Mr Greenwood went on to say:

“In layman’s terms, the Government’s position is that you can take your money as cash from 55. If you are an employee, you have two options. You could be paid into your current account through salary, which is taxed at 13.8% employer national insurance on everything over about £8,000 and the employee pays national insurance of 12% on everything above that figure, and then everything is taxed above the nil rate band. Obviously, you have to be paid the minimum wage of £11,500-ish, but above that, why would you be paid through your salary when you can pay into a pension and take it all out the next day? For payments into a pension, there is no employer or employee NI at all, and only three quarters of it is subject to income tax. The Bill effectively gives everyone over 55 a £10,000 NI-free allowance—four times that in the first year, if they draw their money early.

When the penny drops, people will suddenly realise how much loss there is there. If you are on £40,000 and you maximise this—there are currently no rules to say you cannot do this—the loss to the Treasury is 62% of the revenue they would have got from that person’s employment. That is quite a chunky amount. It is clear from the Budget documents that the Treasury had not spotted this, because if you look at the documents published alongside, and the risk assessment, there was no mention of national insurance at all. They have moved with a reduced annual allowance of £10,000 for those who take benefits early, which reduces it but does not stop it altogether.”––[Official Report, Pension Schemes Public Bill Committee, 23 October 2014; c. 117, Q250.]

I raised that point earlier with the Financial Secretary and asked whether he could tell me what percentage of people the £10,000 threshold would affect. He did not give me a response, so I told him that Mr Greenwood valued it at about 2% of the population, so 98% of the population would be exempted. The Financial Secretary responded that that was Mr Greenwood’s suggestion, but Mr Greenwood was actually referring to a response from the Treasury. That is deeply worrying, because we do not know the implications of the policy.

What we do know is that the Treasury’s policy at the moment is not to respond to Mr Greenwood, because he has written to the Treasury six or seven times without receiving a response. I understand that he has written to the Office for Budget Responsibility once to request a forecast but, as of last Thursday, has not yet received a reply—he might have had a phone call by now. I do not know about other colleagues in the Chamber, but I find that profoundly worrying, if we are potentially losing a considerable amount of money from the Treasury’s coffers—potentially £2 billion to £3 billion, if it is just 10%.

[Mr Love]

The most deeply worrying thing about the evidence presented to the Committee was the attitude of the Pensions Minister, who did not seem to think that there was a problem. Will my hon. Friend confirm that he spoke lightly about the potential consequences of this loophole?

[Tom Blenkinsop]

I thank my hon. Friend, who, as a fellow member of the Committee, attended those evidence sessions. The Pensions Minister confirmed that people can already use this tax scheme—there is no legislation to stop them doing so. The only difference is that the industry is gearing up for next April, and getting the HR processes in place, so that it can give people advice all at once, rather than employer by employer. Mr Greenwood said that he has talked with several people in the industry and that one company had already talked with 192 employers that are looking at that.

The ability to avoid NI in that way already exists, and the Government have a threshold of only £10,000 and nothing planned until after July as a response. That gives them a big headache, because the Prime Minister’s £7 billion tax give-away has been blown out of the water due to borrowing fears. Now another £2 billion or £3 billion is missing. That is £10 billion. The Government like to call the Opposition the debt party, but in fact it is they who have doubled the national debt. Now they will considerably increase borrowing because of the very fact that their own figures are out by a minimum of £10 billion.