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CLAUSE 74: PAYMENTS TO EMPLOYERS OUT OF PENSION FUNDS

SUMMARY

1.         This clause reduces to 35% the tax charge on payments to employers out of funds held by approved occupational pension schemes, and provides for future variations to be by Treasury Order.

DETAILS OF THE CLAUSE

2.         Subsection (1) amends section 601 of the Taxes Act 1988 (which provides for a tax charge on payments to an employer out of an approved occupational pension scheme) in accordance with sub-sections (2) and (3).

3.         Subsection (2) amends section 601(2) which sets the amount of the tax charge by replacing the words "40% of the payment" with "the relevant percentage of the payment".

4.         Subsection (3) inserts into section 601 a new subsection (2A) which defines the relevant percentage as 35% or such higher or lower percentage as may be prescribed.

5.         Subsection (4) provides for the section to apply to payments made to employers after the passing of the Finance Act 2001.

BACKGROUND NOTE

6.         Payments out of a pension scheme are taxed at a special rate.  This was fixed at 40% on its introduction in 1986 and has remained at that level despite corporation rates having fallen.  It was designed to broadly recover the tax relief given on the contributions to the scheme and the tax-free build up of funds.

7.         The Paul Myners Report on institutional investment by pension funds includes a recommendation that the tax charge on payments to an employer of surplus pension funds should be reduced.  The Report suggests that the current charge makes direct payments to employers to reduce surpluses in their pension funds unattractive - because direct payments are effectively taxed more heavily than the alternative of contribution holidays.

8.         The Government accept the need for greater tax neutrality between different options for dealing with surplus pension funds. The reduction of the tax charge to 35% will, following recent reductions in the main corporation tax rate, restore the differential between this rate and the rate of taxation on the withdrawal of pension fund surpluses to its original level.