CONSULTATION
RESPONSE
HM Treasury
Restriction of pensions tax relief:
A discussion document on the alternative approach
August 2010
1.
The NASUWT welcomes the opportunity to comment on HM Treasury
consultation on the restriction of tax relief on pension contributions and
welcomes the Treasury’s decision to engage the relevant stakeholders in
determining the design of the new regime.
2.
The NASUWT is the largest teachers’ union in the UK representing
teachers and school leaders.
GENERAL COMMENTS
3.
The NASUWT notes the Coalition Government’s key objective of
matching the additional tax revenues that have already been built into
public finance forecasts as a result of the previous Government’s
proposal to limit tax relief on pension savings of high earners and of
seeking an alternative to the previous Government’s approach that will
achieve this target.
4.
The NASUWT is extremely concerned that, notwithstanding the concerns
expressed over the complexity of the previous approach, the alternative
method proposed by the Coalition Government would have serious
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consequences for members of the Teachers’ Pension Scheme (TPS)
and its equivalent in Scotland and Northern Ireland and would apply to
levels of income to which it was never intended to apply.
5.
In this respect, the NASUWT notes the proposal to restrict tax relief for
individuals who regularly increase their pension savings by a high
amount each year by reducing the annual allowance from £225,000 to
between £30,000 and £45,000. However, the NASUWT believes it would
be unfair if any new tax regime were to capture everyone who breaches
the new annual limit, regardless of their level of income. This would be
particularly unfair where there are one-off ‘spikes’ in pension value,
involving significant enhancements of pensionable service or pay, which
arise for good reasons such as promotion, transfers in, compensation on
the grounds of redundancy or ill-health retirement, none of which should
attract any additional tax liability.
SPECIFIC COMMENTS
Members who may be affected by the reduced limit
6.
The Union is concerned that the Coalition Government’s proposal to
reduce the annual allowance above which pension saving is to be taxed,
and thus discouraged, from £225,000 to between £30,000 and £45,000
will potentially impose a penalty on teachers on modest salaries for no
reason other than their pursuit of a normal career progression.
7.
For example, if the annual allowance were set at £30,000 with a flat
factor of 20 used for valuing an annual increase under defined benefit
(DB) schemes like the TPS, it is likely to catch individuals with an annual
increase in pension benefits as low as £1,500, depending on their years
of pensionable service. Alarmingly, this means a classroom teacher in
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inner London who simply crosses the statutory pay threshold and joins
the upper pay scale (an increase in annual salary of £4,720 pa at 2009
rates) would, in all probability, be caught by the lower annual allowance
due to the resulting increase in their pension benefit.
8.
Other common scenarios in which teachers on modest incomes could be
liable for tax under the current proposals include:

teachers moving from the provinces to take up teaching posts in inner
or outer London;

teachers receiving recruitment or retention allowances, Special
Educational Needs (SEN) allowances or Teaching and Learning
Responsibility Payments under the provisions of the statutory School
Teachers’ Pay and Conditions Document (STPCD);

teachers becoming an Excellent Teacher or Advanced Skills Teacher;

teachers promoted to headteacher or other leadership posts;

teachers purchasing additional voluntary contributions (AVCs) or
additional pension benefits (particularly by the lump sum method)
under the rules of the TPS;

teachers receiving additional pension as compensation agreed in the
event of a redundancy; and

teachers receiving enhanced service upon their retirement due to
permanent incapacity under the recently reviewed two-tier ill-health
retirement provisions.
9. Whilst in most of the cases above members would be likely to breach
the limit due to an increase in pay, there are other reasons which may
lead to a contributions spike and result in the individual facing a new
tax liability. These include part-timers taking on additional part-time
work at a significantly higher salary, ‘transfers in’ of previous service,
and simple corrections to pension records (e.g. for missing service),
all of which may cause a spike in contributions and incur unintended
tax charges.
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10. Even a teacher who does nothing more than return to teaching after a
long period away, for example to bring up a family, could potentially
be in breach of the limit and face a tax liability due to pay progression
in the meantime under the TPS feature of aggregating service for
pension purposes, whereby breaks in employment do not generally
generate a separate pension benefit.
11. In most of the circumstances above, involving quite modest increases
in pay, the individuals concerned could attract a tax liability without
realising the full consequences of their actions or the career decisions
they are making in good faith. In some cases, the increase in the tax
liability could completely overshadow the increase in salary that led to
the rise in pension benefits that caused it.
12. There are clearly a host of scenarios where members of the teachers’
pension schemes across the United Kingdom on modest incomes
could be adversely affected by the proposed reduction in the annual
allowance in circumstances which were never intended.
13. The NASUWT believes that members of the schemes who progress
up the pay scale, seek promotion or receive a one-off benefit due to
any of the circumstances outlined above should not face an additional
tax charge if the rewards they receive fall within the nationally
determined framework of the Statutory Teachers’ Pay and Conditions
Document or its equivalent.
14. Furthermore, the NASUWT believes the effect of a significantly
reduced annual allowance may become a disincentive to career
progression opportunities that could have a significant effect on
schools’ abilities to promote or to recruit and retain the best teachers
by discouraging talented individuals to take on key posts or even to
remain in the profession. This, in turn, would be a significant obstacle
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to driving up educational standards as envisaged by the Coalition
Government.
15. The credibility of any new tax regime is subject to the system being
deemed fair. In fairness, high earners should expect to be taxed at a
higher level than low income and middle income earners.
16. Ultimately, the NASUWT believes that if the Coalition Government
intends to pursue its alternative approach to reducing tax relief for
high earners, it is essential that the annual limit is set at an
appropriate level, and that the tax rules, rather than pension scheme
rules, are designed to deal with issues such as one-off spikes in order
to avoid those with such increases in benefits falling foul of the
proposed tax regime. Only then will the new arrangements do what
they are intended to do, without being unfair to individuals and
damaging to the effective management of the school workforce.
Conclusion
17. In conclusion, the NASUWT believes it is undesirable that large
numbers of Teachers’ Pension Scheme members with relatively
modest earnings (who could clearly fall into the standard rate of tax
bracket) are likely to be caught by the reduced annual allowance limit
and, therefore, liable to a tax charge on their pension contributions.
18. The NASUWT believes, therefore, that the Coalition Government
should ensure that any alternative proposal on the taxation of pension
contributions should be designed to ensure that it affects only the
target group of high earners.
19. The NASUWT further believes that the current proposals to reduce
the annual allowance could result in lower level and middle level
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earners being discouraged from saving for retirement. It further
believes that the Coalition Government has a responsibility to ensure
that saving for pensions in retirement remains attractive and that
pension provision includes the availability of defined benefit pension
schemes.
20. It is imperative, therefore, that any annual allowance is set at a
sufficiently high level to avoid the consequences previously outlined.
Chris Keates
General Secretary
For further information on the Union’s response, contact:
Steven Sondhi
Senior Official – Salaries, Pensions and Conditions of Service
NASUWT
Hillscourt Education Centre
Rose Hill
Rednal
Birmingham
B45 8RS
0121 453 6150
www.nasuwt.org.uk
nasuwt@mail.nasuwt.org.uk
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