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Treasury refuses to review £2bn pension freedoms tax loophole

The Treasury is refusing to review possible tax avoidance from new pension freedoms, claiming it would be “counter-productive” to draw attention to loopholes.

In a tabled amendment to the Taxation of Pensions Bill, published last week, Labour called for a review of pension freedoms next year focusing on possible tax avoidance.

From April anyone aged 55 or over could use pension salary sacrifice to pay no national insurance and income tax and then withdraw the money from their pension pot the next day. Anyone who accesses pensions flexibly will see their annual tax relief allowance drop from £40,000 to £10,000 but experts still predict the loophole could create a £2bn loss to the Treasury.

Labour has repeatedly pushed the Government to examine how the new freedoms could change behaviour and whether individuals could use them to avoid tax.

Responding to the opposition amendment this week, Treasury financial secretary David Gauke refused to review tax loopholes claiming it would be “counter-productive”.

He said: “The publication of detailed behavioural analysis relating to tax measures has the potential to be counter-productive, because it can itself alter behaviour.

“For example, if we put out analysis suggesting a particular course of action that people could take to minimise their tax bill, that would draw attention to that particular behaviour. It clearly would not be responsible to do that.”

He added: “That is a general and long-standing approach that the Treasury has taken with regard to detailed behavioural analysis. That is not to say that we do not take account of behavioural effects when calculating the costings that we have published—of course we do.

“The analysis is based on those behavioural effects, but, as I said, if we start to break down that analysis into every small detail, that can be counter-productive.”

Gauke repeated his warning that he would monitor the tax impact closely and said analysis would be published in the normal way. Conservative MPs suggested the Treasury select committee or Public Accounts Committee could review the impact of the reforms.

Responding for Labour, shadow Treasury financial secretary Cathy Jamieson said: “I do not think that any of us would want the publication of material to encourage or allow people to go down a line that meant that they avoided paying the tax that was due—far from it.

“However, as we have said repeatedly during debates on the Bill, some behaviours might lead to unintended consequences.”

The amendment was defeated by 10 votes to six at House of Commons committee stage of the Taxation of Pensions Bill.

Earlier this week, the Government U-turned on “unworkable” demands that savers had to inform all pension providers they were accessing their pot flexibly within 31 days.

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. It is primarily senior employees who can negotiate salary sacrifice arrangements. I.e. a minority with fairly significant taxable incomes. How much of a dent will it make for high earners to be able to regularly sacrifice £10k of a >£100k salary? For the majority of those with lesser incomes where this might represent an attractive “scheme”, they are unlikely to have that level of influence with employers. On balance, I think the Treasury is right not to over-react.

  2. Bethell Codrington 26th November 2014 at 2:31 pm

    If this was any other piece of tax legislation, would it be rushed through before it was “fit for purpose”? Or am i cynical in thinking this is more about Votes mext year than well thought our pensions reform?
    Platitudes from Steve Webb leave me distinctly cold. If, and more likely when, it blows up, he will be on his nice (very generous) Defined Benefit Pension guaranteed by the State, whilst the industry picks up the pieces.
    Nothing wrong with the concept, but a bit like a lot of other Government projects, t could end up very expensive and unmanageable, due to the unseemly rush to put something on the Statute Book before the election

  3. I think this is rather a case…..as usual, of the Government of the day acting in a reactive way rather than a proactive way, clearly saves money in the short term and they will hope it needs no further attention in the future THEN “Panorama” get hold of it and suddenly its top of the agenda and innocent pensioners are paraded as tax dodgers and the loop is closed

  4. Salary sacrifice – yep been around for ages.

    Why this has suddenly become a loophole god only knows.

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