Pensions stealth tax sneaks up on Howard

21 April 2005
Brown was only following Lamont's lead


Michael Howard has been keen to pin the blame for the recent pensions crisis on the Labour government, and tax changes introduced in Gordon Brown's first budget are a prime piece of evidence.

And while there is some truth in the claim, he neglects to mention that the same stealth tax was first introduced by Norman Lamont - while Mr Howard himself was in cabinet.

As Michael Howard alleges, in 1997, Gordon Brown abolished the Advance Capital Tax (ACT).

This had the effect that pension funds could no longer claim a refund on the tax they received in dividends from UK companies in which they held shares.

By 1999-2000, the cost of this measure had risen to £5.4bn a year. This figure, which has been widely quoted since as a "raid on pension funds", and is a major contributing factor, according to some accounts, including Mr Howard's, of the current pensions crisis.

The effect was partly offset by a reduction in the rate of corporation tax, from 33 per cent to 30 per cent. However, the net effect was to increase the cost of providing pensions.

The Conservatives refer to it as a stealth tax because it functioned as a means of raising overall taxation without having to break Labour's pledge not raise income tax.

1993 Budget

Ironically, however, the green shoots of this particular stealth tax sprouted during the tenure of Conservative chancellor Norman Lamont.

In his 1993 Budget, he cut the rate of ACT from 25 to 20 per cent - starting the process Gordon Brown was to continue four years later.

Both measures had the effect of reducing the tax pension funds could reclaim on dividend receipts. Lamont's cut the income of many pension funds by 7 per cent. The measure was estimated to raise an extra £500m-600m in tax.

As a result, Guinness said it would have to pay an extra £30m into its pension fund to made up for the effect of this tax, and many other large companies increased payments into their funds or ended payment holidays early.

British Telecommunications also cited Lamont's measure as a cause when it announced that it had found a £750m shortfall in its pension fund.

So while Labour's abolition of dividend tax credit did hit pensions hard, it was building on work that had been started by the Conservative governments some years before.

Sources
Michael Howard's speech, 17 April 2005.
BT pension scheme in Pounds 750m shortfall, Financial Times, May 14, 1993. Pension bomb hits Guinness for £30m, Daily Mail, September 24, 1993. Election Briefing 2001 (pdf), Institute for Fiscal Studies.


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