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Experts query Govt pension recycling tax leak estimate

Pension experts say the Government’s attempt to clarify its estimate of the impact of a new pension recycling loophole created by the Budget has further confused the issue.

In a letter sent to members of the Taxation of Pensions Bill public committee, Treasury financial secretary David Gauke put the revised forecast to the tax loss resulting from exploitation of salary sacrifice at just £5m in 2015, rising to £35m in 2015/16.

But experts have previously predicted the loophole could cost the Government at least £2bn in lost tax revenue.

Towers Watson senior consultant David Robbins says the letter and figures are “not clear enough” to properly understand how the Government’s has arrived at its estimate.

The same letter, seen by Money Marketing, shows the Government’s projection for the impact of the new annual allowances rules. Under the reforms, the annual allowance will drop from £40,000 to £10,000 once savings are accessed flexibly after April next year.

Robbins says it is expected the Treasury would make a tax gain as a result of the allowance change, but the letter shows a tax loss rising to £120m a year by 2018/19.

He says: “The annual allowance figures don’t make sense to me, unless you make a big assumption. Apart from the first year it shows an Exchequer cost resulting from the policy decision to reduce the annual allowance from £40,000 to £10,000 to close the scope for tax avoidance – that shouldn’t be a cost, that should be a saving.”

He says the only way the Treasury could think it will have a tax loss is if it is making an assumption that the annual allowance was originally planned to be put down to 0 per cent, as opposed to £10,000.

Labour shadow financial secretary Cathy Jamieson also questions the validity of the Government’s figures.

She says: “Yesterday the Government finally published additional figures regarding this Bill’s potential to increase tax avoidance or welfare costs to the state – yet we have no idea what these figures are based on. In addition to this, the Office for Budget Responsibility has said there is “very high uncertainty” surrounding the Government costing of the pension reforms announced since the budget, something the minister failed to mention during the debate.

”It is because of this uncertainty that we have consistently asked the Government to ensure that these reforms are subject to review. But every single one of our requests has been refused. I hope this Bill delivers the greater freedom and choice the Government has promised and it does not result in any unintended consequences.”

Speaking following the Autumn Statement at the report stage of the Taxation of Pensions Bill, Gauke said the OBR-approved figures rendered two Labour clauses to the Bill “unnecessary”.

The clauses would compel the Treasury to produce a cost estimate of the impact of the Bill on salary sacrifice, income tax receipts and NICs, as well as the fiscal impact of the changes to the pensions death tax.

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  1. Why is salary sacrifice, which wasn’t created by the recent Budget, and has been around for years, suddenly being touted as a loophole?

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