Govt trebles cost of pension tax changes
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Chancellor Alistair Darling has trebled his estimate of the one-off costs that pension schemes, employers and individuals will incur as a result of the tax on higher earners’ pension contributions.
According to Towers Watson, it has also increased its estimate of the annual costs of administering the new tax by more than one quarter.
The new impact assessment published alongside yesterday’s Budget says the one-off costs incurred during the transition to the new regime will total £900m or around £3,000 for each of the 300,000 taxpayers affected.
This compares to the £305m estimate published in December. The increase is worst for employers, whose one-off costs are now expected to be £330m rather than £40m. Annual costs are now expected to be £115m rather than £90m.
Head of defined benefit pension consulting John Ball says the plan is “fiendishly complicated”.
He says: “Restricting tax relief for people with incomes above £130,000 is fiendishly complicated, especially for those in defined benefit schemes, and complexity costs money. Some of the original assumptions were from cloud cuckoo land.
“For example, the Government said each employer would only need to spend £250 on communicating changes that could add thousands of pounds to senior employees’ tax bills, and that pension schemes could deal with members’ queries in half an hour at a cost of £20 per member.”
The Government now assumes employers will spend between £500 and £2,000 each on communications. It says employers will devote eight man hours per affected employee in a defined contribution scheme and 16 man hours per employee in a defined benefit scheme, to dealing with enquiries, at a cost of £25 per hour.
This will then fall to two hours for DC schemes and four hours for DB schemes.
Pension schemes will devote an average of four hours per member in defined benefit schemes and two hours in defined contribution schemes to dealing with member queries. This will cost £40 per hour. Further one-off costs of four hours per member will be incurred for DB schemes only.
In the new impact assessment, the Government says it is assuming around 40,000 people will exercise the option to make their pension scheme pay a tax charge of £15,000 or more on their behalf and deduct the money from their benefits.
Ball says: “This is supposed to be a tax on individuals, but the Government does not want to ask people to write cheques for more than £15,000 when they complete their self-assessment forms. It is therefore putting pension schemes in the front line of tax collection.
“This will lead to higher administrative costs as adjustments will have to be made to benefit estimates not only at the time the tax is paid but when annual benefit statements are sent out or transfer values are calculated.”
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