Changes introduced in Tuesday’s Autumn Statement to restrict tax relief on asset-backed contributions to pension schemes are likely to make them less attractive to large companies.
The new limits on tax relief for asset-backed pension contributions were set out in draft clauses of the Finance Bill 2012, but came into effect from the date of the Autumn Statement on 29 November this year. The changes follow a consultation on pension schemes earlier in 2011 and are expected to save the government almost half a billion pounds in tax relief per annum.
Chancellor George Osborne said in his Autumn Statement earlier this week that the move would stop “some large firms using complex asset-backed pension funding arrangements to claim double the amount of tax relief that was intended.”
The new rules on tax relief were intended to “reflect accurately the total amount of payments the employer makes to the pension scheme directly or through a special purpose vehicle, for example a partnership,” HM Revenue & Customs echoed in a statement.
Transitional rules will apply to existing arrangements that have already received tax relief, the Government said.
In the past, employers using assets as collateral that generated an income stream for a pension scheme could claim tax relief twice – first as a deduction on the pension contribution upfront and secondly as a deduction for income payments derived from the asset. This created “unintended and excessive tax relief,” HMRC said.
Slowing adoption
Asset-backed pension schemes can have advantages for employers, however. Payments can be spread over several years and it is possible to adjust the overall contribution by agreement to take account of changing economic circumstances and deficit levels, according to the Treasury.
Asset-backed pensions can also provide security to pension schemes, which have a right to the underlying asset if the income stream ceases or the employer becomes insolvent.
According to HR consultancy Mercer, asset-backed contributions can help to address deficit issues and reduce the need for cash upfront when compared with typical cash-only recovery plans. But it added that there needed to be a more “level playing-field” for pension tax rules introduced.
Ian Gordon, partner specialising in employment and pensions at law firm, McGrigors, warned that the restrictions on tax relief may “slow the pace of adoption” of asset-backed pensions. PwC partner Alex Henderson also indicated that, although the changes were expected after the previous consultation exercise, their scope may have surprised some observers.
“Overall, the measures look to restrict relief rather than abolish it. We expect this area to be of continuing interest for many employers facing deficits in their schemes and employers will be pleased to have the additional certainty of specially designed legislation,” he said.
But George Bull, a senior tax partner at Baker Tilly, said the shift would help pay for substantial chunks of the cost of various tax give-aways – delaying the January 2012 fuel duty increase to August, cancelling the August 2012 increase as well extending the small business rate holiday until 2012/13.
