UK - The government has defended its decision to raise the ‘special allowance’ for receiving higher rate tax relief on pension contributions by just £10,000 on the basis it would only cost an additional £70m (€81m).

In a debate on the amendments to the Finance Bill 2009 Stephen Timms, financial secretary to the Treasury, claimed the anti-forestalling measures had been introduced to “protect an estimated £2bn of tax that could have been at risk otherwise” between 22 April 2009 and April 2011.

The measures followed the Budget announcement earlier this year that the higher rate of tax relief on pension contributions would be gradually cut from 40% to 20% in 2011 for those earning over £150,000.

Timms claimed the original measures had a special annual allowance limit of £20,000 on which pension members could receive higher rate tax relief, in an effort to make the interim arrangements “fiscally neutral”.

However following amendments tabled by the Conservative Party in June - to change the definition of regular pension savings to an annual basis rather than quarterly and to recommend contributions are calculated as an average of the last three years with a limit of £50,000 - the government made some concessions.

In its own amendments put forward last week it agreed contributions should be calculated as an average over a three-year period to help the self-employed and other irregular pension contributors, but only increased the special allowance to £30,000. (See earlier IPE article: Gov’t Finance Bill amendments not enough)

Timms argued: “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.”

He added the £30,000 level “is sensible and will bring the costs of the anti-forestalling regime down to an additional £70m over the next two years—more than would have been the case without the relaxation, but an affordable level”.

However he claimed if the government had agreed to the opposition’s limit of £50,000 it would have raised costs by “£130m, nearly twice as much”, while the higher level could  potentially “open a loophole for people with several pensions to have an annual limit of £50,000 on each”.

Meanwhile Timms admitted the government could be more “flexible” around the issue of protecting pension contributions when a member changes pension provider, but warned: “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.”

Mark Hoban, shadow minister to the Treasury for the Conservative Party, said: “I am still not convinced they have moved far enough in recognising the difficulties for those who are self-employed who make irregular contributions to their pension funds. I would have preferred a more generous limit, although I take on board the Minister’s comments about the cost of the £50,000 limit compared with the cost of the £30,000 limit.”

Lane, Clark and Peacock (LCP), the consulting actuarial firm, added the £30,000 allowance is a “very limited concession”, particularly as it still leaves much “unfairness, anomalous comparisons and uncertainties of operation”.

The Bill has now passed through the House of Commons and is scheduled for a second reading in the House of Lords on 20 July 2009.

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