MPs have piled the pressure on the Government to deal with a massive pension tax loophole created by its Budget reforms.
At the Pension Schemes Bill public committee hearing yesterday, MPs raised concerns about the potential for tax avoidance from new pension freedoms.
Under the new rules, anyone aged 55 or over could use pension salary sacrifice to avoid paying employer and employee national insurance as well as collecting tax relief on income tax.
They will then be able to immediately withdraw the money from their pension pot, subject to marginal rates, without ever having paid NI or income tax.
If someone withdraws from their pot then their annual tax-free allowance on contributions reduces from £40,000 a year to £10,000.
During the session, Corporate Adviser editor John Greenwood said if everyone took advantage of the loophole the Treasury would lose £20bn a year but corporate advisers are estimating more than £2bn will be lost to the Treasury.
He said: “When the penny drops, people will suddenly realise how much loss there is there. If you are on £40,000 and you maximise this—there are currently no rules to say you cannot do this—the loss to the Treasury is 62 per cent of the revenue they would have got from that person’s employment.
“That is quite a chunky amount. It is clear from the Budget documents that the Treasury had not spotted this, because if you look at the documents published alongside, and the risk assessment, there was no mention of national insurance at all.”
Bill committee chair Conservative MP Peter Bone said: “I guess what you are suggesting is that if you are a limited company that you own and are a director of, this would be something you would look at seriously.”
Shadow pensions minister Gregg McClymont said: “The issue surely is whether there is the chance to take a tax-preferential approach to one’s income. The history of the last 40 years would suggest where that possibility exists. Human resources and individuals are often keen to take those advantages where they can be found.”
Greenwood said he had written to the Treasury six times with no adequate response and Labour MPs asked whether it has addressed the issue.
Labour MP Michael McCann said: “Having identified the problem, has any work been done to identify a solution that would not break the objective of giving people the flexibility about their pension resources in the way that the Government want?”
Labour MP Andy Love said: “There is a pension taxation bill in the works in the Treasury. Do you have any indication that it is furiously working through the six communications that you have delivered to it about trying to close the loophole?
Pensions minister Steve Webb, who was both a witness and sat on the committee, said the Treasury had done “global” analysis of the impact but nothing specific.
In a testy exchange, Webb said: “Clearly, it is a theoretical issue. As we have said, anyone who does this once sacrifices a big slug of tax-free allowance for the rest of their life, so there is a downside risk. There is a cost to employers and a barrier. To put it gently, is there not a risk of overstating this?”
In reponse to Webb, Greenwood said: “I have said all along that it could be 10 per cent of £20bn. I think that is possible. If you have £20bn tax relief on the table, how much of that is going to get taken up? I don’t know. I have asked my expert readers and they have come back and suggested that at least 10 per cent will.”