TAX NEWS - JUNE 2010
UK Tax: George Osborne faces second tax battle, over pension tax relief
The rise opens a second front in the attacks on George Osborne, who is already being criticised over an expected doubling of capital gains tax.
Miles Templeman, Director General of the Institute of Directors (IoD), said that the planned reduction in tax relief on pension contributions was causing industrial leaders and other business people great anxiety. "This tax would be a problem individually, but collectively, with capital gains tax rises, we feel that we are being set upon as a group," he said. "We strongly ask the Chancellor to think about this tax rise again."
Richard Lambert, Director-General of the CBI, said that the pension tax changes would damage business. "This will have serious consequences — it will make it much harder for UK business to attract and retain global talent," he said.
From April 5 next year, people paid more than £150,000 a year will pay much more tax. The measures were quietly passed by Parliament in three days before the Commons was dissolved for the election, nodded through by the Conservatives.
At present, if a higher-rate taxpayer puts £20,000 into a pension pot every year, tax breaks mean that only £12,000 is paid by the individual towards the sum. Under the new rules, the cost will rise to £16,000.
Mr Templeman said that the row over planned increases in capital gains tax, expected to be announced in the Budget on June 22, had overshadowed pension tax relief.
Accountants estimate that the tax bill for at least 300,000 professionals, business people and senior civil servants will rise next year by about a quarter if the measures go ahead.
Mike Warburton, tax director of the accountants Grant Thornton, said: "The previous Government introduced draconian rules to limit pension tax relief from next April. These were set out in the Finance Bill but passed into legislation without any scrutiny by Parliament when the election was called as part of the wash-up."
He added: "It is imperative that the new coalition Government reassesses these regulations before they take effect."
Mr Lambert said: "It will impose high marginal tax rates on people at the threshold. It's an incredibly complex set of arrangements, and it reverses policy set in train in 2006. In every way, it's a bad move."
He added: "It will help to undermine even further defined benefit schemes because the best-paid people in a company will be encouraged to leave their existing pension scheme, which means their interests are no longer aligned with other employees."
The IoD and the accounting industry want Mr Osborne to hold a review of the changes. Tax experts are angry that the measures have never been debated in Parliament but are already on the statute book. They argue that, while the new law is widely known in tax circles, it will catch most higher-rate taxpayers unawares.
The changes were a proposal in Alistair Darling's 2009 Budget, but they were firmed up in his final Budget in March. The Conservatives did not vote against the changes, nor did they seek to block the new legislation when they had ample opportunity in the run-up to the election.
In April, Mr Darling's Budget measures were set out in the 167-page Finance Bill, which had to be pushed through the Commons in less than a week to reach the statute book. The Bill must become law before the new financial year, otherwise Revenue & Customs is not allowed to levy income tax. For the Bill to proceed quickly, deals were agreed between Labour and the Conservatives in which the Tories were given the chance to throw out some measures. They did not contest the pensions tax change.
The Conservatives made keeping taxes low a key election theme, promising that spending cuts would be the focus of tackling the budget deficit.
An aide of Mr Osborne said: "There are many tax rises left over from the previous administration coming down the line. We don't like this one, but we have inherited a record budget deficit and have to deal with it. Our priority in terms of tax is avoiding those hitting people on lower and middle incomes."
The new measure is the latest in a series of increases faced by top-rate taxpayers. Last month a 50 per cent rate was introduced. At the same time, anyone earning more than £100,000 faces the gradual withdrawal of the £6,475 personal allowance. Next April national insurance contributions are to rise by 1 per cent and it is expected that capital gains tax will rise from 18 per cent to as much as 50 per cent for higher-rate taxpayers.
John Whiting, tax policy director of the Chartered Institute of Taxation, said: "I don't think that higher-rate earners have quite appreciated the overall impact of all these taxes. When you add them up, they represent really quite a serious hit."
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