Actuaries hit out at new ‘flawed’ UK proposals tax and warn they will hit middle and low earners

News - Tax

Written by Ray Clancy

Monday, 08 March 2010 09:39

Pension tax changes in the UK for those on higher incomes are unrealistic and severely flawed and should be withdrawn, it is claimed.

The Government’s pensions tax relief reforms are ill thought out, complex, costly to implement and will damage the pension prospects for those on middle and low incomes says the Association of Consulting Actuaries in a detailed response to the HM Treasury and HM Revenue & Customs consultation paper Implementing the restriction of pensions tax relief.

The policy is intended to raise revenues from around 300,000 high earners but in reality it will directly affect many more people and will have the effect of reducing pension prospects for hundreds of thousands of employees on low and middle incomes as the closure of good schemes accelerates, as a consequence of the measures, the ACA points out.

‘We understand the desire to raise additional revenues in the current climate and that those on higher incomes must accept they will bear a higher proportion of the tax take. However, the policy proposed, centred round an income threshold, is just about the most complex and inefficient way possible,’ said ACA Chairman, Keith Barton.

‘It seems to have been dreamt up with scant regard to how arbitrary it will be as comparing one individual to another. Worse still, it seems almost to have been designed to do maximum damage to ongoing pension provision in direct opposition to the Government’s stated policy of encouraging the retention of quality schemes,’ he added.

Barton says he hopes that whatever political party is in power after the forthcoming general election they will be sensible enough to look again at a simpler way of achieving the same end objective.

The ACA points out that the tax measure proposed breaches just about every aspect of the Canons of Taxation developed by Adam Smith to denote a ‘good tax’. In particular it will not be readily and easily assessed, collected or administered and there is no consistency and stability in the prediction of bills.

Also the compliance and administration of the tax will certainly not be minimal for the HMRC or employers, schemes and individuals and the complexity means mistakes will be rife.

Karen Goldschmidt, Chairman of the ACA Pensions Taxation Committee, gave one example in the response; with just a one pound difference in income, individuals could experience a tax charge varying from nil through to over £13,000.

‘Already, we have seen employers proposing withdrawing pensions as an element of pay package for salaries well below the £130,000 income threshold because of the risk that granting some normal element of income, or indeed some personal income, or a quirk of the way pension is valued could trigger this super-tax,’ she said.

‘And separately, we have noted how, unless properly carved out, redundancy payments could inadvertently cause a large tax charge for middle income employees, at just about the worst time possible, when an individual loses their job,’ she explained.

‘We are 13 months off the date after which making pension savings could trigger the new tax. The detailed drafting of the legislation has barely begun. In such circumstances, it cannot be surprising so many employers are turning away from pension provision,’ she added.