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Pensions Bill

moved Amendment No. 11: 11: After Clause 3, insert the following new Clause— ““Tax effect of automatic enrolment (1) The Secretary of State shall ensure that every jobholder who— (a) becomes an active member of an automatic enrolment scheme under section 3, and (b) has not opted out under section 7, receives value equivalent to the contributions made by him multiplied by the basic rate of tax applicable at the time of the payment of the contributions. (2) The value referred to in subsection (1) shall be delivered in accordance with regulations made by the Secretary of State and may include— (a) tax relief to the jobholder if that jobholder would otherwise pay tax at the basic rate an amount of income equivalent to the amount of his contributions, and (b) direct payment by Her Majesty’s Commissioners of Revenue and Customs to the relevant automatic enrolment scheme.”” The noble Baroness said: Amendment No. 11 introduces a new clause after Clause 3. This is a probing amendment designed to allow the Minister to explain how the tax contribution to automatic enrolment schemes will work. The Minister will be aware that I trailed at Second Reading the fact that I had had initial discussions with his officials and that I would use our Committee stage to explore this further. I believe that the tax aspects of the Government's pension proposals have received little attention, but they are potentially important. My amendment refers to automatic enrolment, which will cover all jobholders. My concerns arose initially from personal accounts, but it is illogical to focus on personal accounts when automatic enrolment into workplace pensions may be at least as important an aspect of the provision of pensions. I take the Committee back to the Government's White Paper in May 2006, Security in Retirement: Towards a New Pensions System. In paragraph 36 of the executive summary, under the heading A New Pensions Settlement: Our Proposals for Reform, the Government's proposals were described as follows: "““The scheme will have the following key features:""Employees will contribute 4 per cent … Employers will make minimum matching contributions of 3 per cent … A further 1 per cent will be contributed in the form of normal tax relief””." A footnote said that this 1 per cent, "““represents basic rate tax relief on individuals' contributions””." I think that we all bought the arithmetic of personal accounts as four plus three plus one. The December 2006 White Paper, Personal Accounts: A New Way to Save, said, in paragraph 63, that, "““employees will pay contributions of around 4 per cent … the employee contribution will be matched by 3 per cent from the employer together with around 1 per cent in the form of normal tax relief from the State””." When we come to the Bill, the 1 per cent contribution has disappeared. Instead, Clause 19, which deals with money purchase schemes, and Clause 25, which concerns personal pension schemes, refer to a total of 8 per cent, with the employer’s portion being at least 3 per cent. There is no mention of tax and so the employee’s portion is 5 per cent. Tax can be an important element of the economics of pensions saving, and it is particularly important at the lower end of the income spectrum, where the advantages of saving may be less pronounced due to the impact on, inter alia, means-tested benefits, which we discussed earlier. In some cases, the tax element can produce virtually the whole benefit of saving. It seems that the Government expect the tax element to be delivered not to the personal accounts scheme or other automatic enrolment scheme but to the individual via the PAYE system. That may be fine for a lot of people but it will not work for all. The threshold for the start of automatic enrolment is set at £5,035 in the Bill and we expect it to be uprated to match the primary threshold for national insurance purposes, which, in turn, is normally expected to be the same as the personal allowance for tax purposes. However, we have recently found that the Government—for political reasons, which I need not rehearse today—have chosen to increase the personal allowance this year by £600. Let us assume that the bottom level is set for the purposes of auto-enrolment at this year’s primary threshold of £5,435. However, once the Finance Bill is enacted, the personal allowance for tax purposes for this year will be £6,035. If I earn £6,000 a year—which is approximately 21 hours a week at the minimum wage—auto-enrolment will take £48 from me but, being below the basic rate threshold, I will get no tax relief; I will pay the whole 5 per cent on the relevant portion of my earnings. There will be similar results if I have tax reliefs in excess of the basic rate, the obvious ones here being the blind person’s allowance, which is £1,800, or one of the age allowances, which are worth more than £3,500. Another problem area would be people working for part of the tax year. Tax allowances are available for the whole year and not for the parts of the year that are worked. If I earned at an annual rate of, say, £12,000 and started work half way through the tax year, or stopped working half way through the year, my earnings for the year would be £6,000 and, if it were this year, I would pay no tax. However, under the auto-enrolment pay reference period rules, I would expect to pay pension contributions based on a little under £3,500 because I would get a proportion of the first threshold knocked off before triggering auto-enrolment contributions. Therefore, I would probably have to pay something in the region of £174 in pension contributions but would get no tax relief because I would not be paying any tax. Similarly, if I earned at an annual rate of £24,000 a year and worked for only three months in the year, I would pay no tax and would therefore get no tax relief, but a little under £240 would be taken from me in contributions or through the auto-enrolment method, for which I would get no relief. I do not know how many people would be affected by this but they would be mainly those who earn around the thresholds, and that inevitably means those who earn the least, which probably involves women. The Turner report, or Pensions Commission report, recommended in section 9(i) of its executive summary that, "““the option of creating a scheme specific tax relief regime … based on a single rate of tax relief and a matching up-front contribution approach, should be considered in detail. And we believe that, whether or not a scheme specific regime is created, the tax treatment of NPSS””—" that is, personal accounts in today’s language— "““contributions should mirror the attractive features which currently apply to saving via a Stakeholder Pension, i.e. the fact that starting-rate and non-taxpayers, many of whom will be part-time employees, can receive tax relief at the basic rate””."" I could not find any reference in the Government’s White Papers to the detailed consideration recommended by the Turner report, and there is certainly no mention of the stakeholder method of delivering relief directly to personal accounts or to the pension scheme. My amendment seeks to ensure either that the employee gets basic rate tax relief on his contributions or that an equivalent amount is paid to the pension scheme. The latter is meant to mirror the stakeholder arrangement. I do not pretend that the amendment is perfect, and I have already said that it is probing for the purposes of today’s debate, but I hope that it will enable the Minister to respond to the issues in a positive way. I beg to move.