New Clause.—(Simplified Procedure For Small Pension Schemes.)

Where in the year 1966–67 or any subsequent year of assessment an employer pays a premium or other consideration under an annuity contract in circumstances where relief from tax would have been available to an employee of his under section 23 of the Finance Act 1956 in respect of the payment if the contract and the payment had been made by the employee then—

(a) sections 22, 23 and 24 of the Finance Act 1956 shall have effect as if the payment had been made by that employee under the annuity contract and as if the annuity contract had been made by the employee; and

(b) if that employee is chargeable to income tax under Case I of Schedule E in respect of the employment by reason of which the premium or other consideration was paid by his employer the sum so paid, if not otherwise chargeable to income tax as income of the employee, shall be deemed for all the purposes of the Income Tax Acts to be an emolument from that employment for the year of assessment in which the sum was paid.—[Mrs. Thatcher.]

Brought up, and read the First time.

Mrs. Margaret Thatcher (Finchley)

I beg to move, That the Clause be read a Second time.

The purpose of the Clause is not, perhaps, apparent from the wording. I would like, therefore, to spend a moment explaining the purpose before I explain the mechanism by which that purpose can be put into effect. Its purpose is to help small employers to provide pension benefits for those who work for them. As Niall Macdermotthe Financial Secretary will be aware, small employers cannot quite so easily provide those benefits as can larger employers. If an employer has a large number of people working for him, he can have a special superannuation scheme under Section 379 of the Income Tax Act, 1952. This gives the large employer certain taxation benefits and it gives the employee who works for the large employer a considerable number of taxation benefits under that Section.

Broadly speaking, the benefits are these. The contributions made by the employee to the scheme are wholly deductible in calculating the employee's tax liability. Once those contributions have been made the fund which they go to swell is also exempt from tax on dividends and interest payments. The third feature of this scheme is that the pension benefit comes out in the form of income and [column 80]is taxable when it emerges. There is, however, in general a principle of taxfree build-up both of contributions and of the fund and a taxable benefit as earned income under Schedule E. So much for the Section 379 schemes.

Those who do not have enough workpeople to provide for them in such pension schemes have to turn to another Section of the Income Tax Act, Section 388, and have to attempt to provide for them in that way. Under schemes under Section 388, however, the employee does not get full contribution relief. He gets only partial relief of the same amount as he would get under a life assurance scheme. Moreover, those contributions go to make a fund which is not exempt from Income Tax.

The benefits, on the other hand, when they emerge, in so far as they emerge as income, will be taxable as income but up to one-quarter of them can be taken as capital. That is why there is not a taxfree build-up of these schemes. The difference between the two types of the schemes means, however, that it costs the small employer more to provide an equivalent pension benefit for his employee than it costs the employer who has a large number of people working for him. We on this side believe that it would be better if it cost an employer the same amount to provide a unit pension for his employee regardless of whether he employed a lot of people or a small number.

Certain changes were made in the Finance Act last year. By virtue of Section 69 (7) of the 1965 Act, the Section 388 funds—those mostly used by small employers—were exempt from Income Tax. At the time when I was being tutored on these matters, those who know all about them told me that the Section 388 funds got the benefit of a gross accumulator. I did not quite understand what that meant at the time. It sounded so much like a nickname for James Callaghanthe Chancellor of the Exchequer. I was then told hastily that the gross accumulator was a desirable thing to have, and I understood at once that it could not possibly apply to the Chancellor of the Exchequer.

A gross accumulator really meant that the funds should be allowed to accumulate tax-free and that it was possible to claim back the tax on interest and dividends. This was one of the great benefits given, [column 81]apparently unwitting by the Government last year. It is one of the benefits which, under this year's Finance Bill, tucked away in Schedule 4, paragraph 9, the Government are attempting to withdraw. This is another example of the Government not knowing what they were doing last year and bringing in a change this year which reverses what they did a year ago. How we know that they think they know what they are doing this year, we do not quite know. That may not sound clear, but the Government themselves are not clear on this matter. If they did not know what they were doing last year, I do not see how they should know what they are doing this year in withdrawing the relief. Nevertheless, they are attempting to withdraw this relief in Schedule 4, paragraph 9.

It would be fair to say that the Government never intended to give this relief in respect of general annuity funds or any annuity funds whereby a large amount of the annuity can be taken out in capital form, because, on the whole, this relief is meant to apply only where the benefit comes out in income form. Therefore, one cannot, perhaps, object too hard that the Government are taking away half of the relief this year. It is, however, an unfortunate by-product of the withdrawal of this relief that relief should be withdrawn from Section 388 schemes which are used so much by small employers.

There is a way of getting out of this dilemma. One accepts that in so far as employees under Section 388 schemes can withdraw part of their benefits in the form of capital, they should not, perhaps, have the tax-free exemption which the Section 379 schemes have. On the other hand, we hope that the Financial Secretary will agree that small employers should not be at a disadvantage taxwise in providing pensions for their employees. The solution which we propose to the dilemma is contained in the new Clause, which, I hope, by this stage is becoming clear.

The solution which we are propounding relies by precedent on the 1956 scheme in the Finance Act of that year, when, the Financial Secretary will remember, for the first time special pension benefits were introduced, mainly for the self-employed but also for those who worked in non-pensionable employments. That [column 82]scheme was known as the Millard Tucker scheme. It followed the Millard Tucker inquiry and it was embodied in the 1956 Act.

The scheme there was founded upon exactly the same concepts as Section 379 schemes—that is to say, the self-employed and those in non-pensionable employment should be able to contribute to a scheme and get their contributions allowed for tax. The scheme to which they contributed should have its funds exempt from tax as far as dividend and interest payments were concerned. Once the benefits came out, they should come out in the form of income and should be taxable as such. The scheme was on all fours with Section 379 schemes but could not be used for small employers in so far as the small employer himself made contributions.

The particular 1956 scheme related only to contributions made either by the self-employed or by the employee. It did not enable the employer to make the contributions and to get the complete benefits of the 1956 scheme. The solution we propose is designed to help the small employer to provide pensions on the same footing as the employer of a large number of people and is a modification of the 1956 scheme whereby the employer's contributions shall count themselves as if they were made by the employee.

Without this new Clause, the small employer will have to pay more to provide the same pension benefit for his employees. The new Clause would provide a method whereby the small employer could get the benefits of tax-free accumulation in so far as he wished to provide income benefits for his employees. We think it important that as many people as possible should have extra pension benefit and that it is as well that they should have a source of income that is not wholly dependent upon Governments.

Most of us on the back benches, whether on this side or that, have a healthy suspicion of Governments. On this side of the Committee what we think about the Government financially would be quite unspeakable, let alone unprintable in Hansard. But it would be advisable for an employee to have a second pension benefit. So far as I can see, even though the Government want to provide half pay on retirement there is no hope of that coming for many [column 83]years and in the meantime private employers could do the job without great cost to the Exchequer. We hope that the Government will look favourably at the new Clause, to enable small employers to do for their workers exactly what the large employers have done for many years.

Mr. Gower

I shall not attempt to repeat what my hon. Friend the Member for Finchley (Mrs. Thatcher) has said so lucidly and fairly, but one other point deserves mention. It is commendable to a degree when a large employer provides an effective pension scheme for his employees, but it is all the more commendable when a relatively small employer goes very often to great trouble to evolve a pension scheme for his employees. Whether he be trading as a company or as a partnership in a small family firm, it is not an easy thing for such an employer to do and it would be intolerable for him to be in a disadvantageous position as compared with large companies.

I may be wrong but I have for a long time suspected, perhaps wrongly, that the Government are far too attached to large units. They are in favour of great economic units, State-owned or otherwise. Even when they have not nationalised organisations, they seem to have greater partiality for the large companies, perhaps because it is easier to nationalise them than smaller units.

Perhaps economic conditions have often forced the Conservative Party in the past to appear to take up the same position but it would be a bad day for the country if we did not give maximum encouragement to small units of all kinds. These small units give valuable employment to millions. It would be intolerable if their position vis-á-vis industrial pension schemes were less advantageous than that of big companies and I hope that the Financial Secretary will consider that aspect as well as the point put by my hon. Friend.

Mr. MacDermot

I am rather intrigued to guess what the unprintable thoughts of the hon. Lady the Member for Finchley (Mrs. Thatcher) about the Government are. But the thought that she has expressed surprised me. She said that the phrase “gross accumulator” made [column 84]her think of my right hon. Friend the Chancellor of the Exchequer. I had always thought, judging by the criticism of hon. Members opposite, that he did not accumulate enough, that he spent too much, that national savings were dwindling, etc. I am glad that hon. Members are converted and now look upon my right hon. Friend as a gross accumulator. It is a title of which I am sure he will be proud.

The hon. Lady said that the new Clause is moved to help small employers to provide pension benefits. I had assumed that that was, indeed, the purpose, although, in terms, it would not be limited to that and could be used by large employers as well. As she has made clear—she is always clear—the purpose is to make available to small employers the facilities which are available to the self-employed and to an employee for whom his employer has not made pension rights available under the Millard Tucker scheme.

My short answer is that the small employer can avail himself of the facility now by the simple means of increasing the payment he makes to his employee by the amount that he would contribute to such a pension scheme under the new Clause and then requiring a contractual obligation from the employee to spend that additional amount in taking out a policy under the Millard Tucker scheme. Thus, the facility is available and can be used by a small employer in such a situation.

Something on the lines of the new Clause has been urged upon us by the Life Offices' Association. When we pointed the means out to the Association, we learned that this did not quite meet what they were after. They were thinking particularly of the employer who wanted to provide for one or two of his employees—perhaps persons like foremen or managing clerks or others in responsible positions—and to retain some degree of control over the annuity contract—in particular, to get back some of his outlay if the expected beneficiary left of his own volition or was dismissed.

Hon. Members on both sides of the Committee—certainly on this side—would not regard a change of job by such a beneficiary as a very terrible development, however. We do not want to devise provisions which will tie people, as it were, to the employment of a [column 85]certain employer. The whole movement now is towards greater transferability of pension benefits. We would not view with favour a provision of that kind, nor, presumably, would the hon. Lady and those who support the new Clause, because that would not meet the point put to us by the Life Offices' Association either.

All I would say, therefore, is that as it stands the Clause is not necessary. The provisions of the 1956 legislation are available and can be used in the way I have indicated by the employer of the kind whom the new Clause is designed to help, and we do not see any need for a Clause of this kind.

Mrs. Thatcher

That was not an entirely satisfactory reply, but I want first to deal with the hon. and learned Gentleman's opening words. I would have thought that James Callaghanthis Chancellor of the Exchequer was the grossest accumulator of debts that this country had ever known. Therefore, he remains a gross accumulator not only of debts but of the taxpayers' money each year in order to meet increasing Government expenditure.

The Chief Secretary to the Treasury (Mr. John Diamond)

And inherited deficits.

Mrs. Thatcher

So far as the right hon Gentleman's interjection was in order, I would point out that the adverse balance in 1951 was within £2 million of what it was in 1964. However, you would stop me, Mr. Grant-Ferris, if I went further on that theme, as I can see from the way you are now thinking.

If the employer can already use the provisions of the new Clause by a device[column 86]—and I think that the Financial Secretary would agree that it would be by a device—I do not see why the hon. and learned Gentleman should object to making it more specific that the benefits of this piece of legislation should attach to employers. Not enough people are using this legislation and more of them would know about it and would use it and would benefit by it if it were made clearer than it now is.

It is all very well to say that these employers could pay their employees a little more, but they might want to have a little more control over what they paid to their employees. They might pay an employee an extra £50 a year but not have enough control over where that £50 went. If an employer is to pay a certain extra amount, he may want to pay that amount in the certainty that it will go towards providing the pension for which he is making provision.

As the Financial Secretary has indicated that the cost would be negligible—indeed, there would be virtually no cost, because this is a relief which is being withdrawn this year—I do not see any reason why we should not have something along the lines of the Clause and the 1956 legislation, and I ask the hon. and learned Gentleman to think about that. If he will give that undertaking, we will not have to press the matter to a Division, but if he does not, we shall have to divide the Committee.

Question put, That the Clause be read a Second time:—

The Committee divided: Ayes 123, Noes 210.