Finance Bill: Making Tax Digital shelved, but plans for MPAA remain unclear

Controversial plans for new digital tax returns have been put on ice, but pension savers are still in the dark over cuts to the Money Purchase Annual Allowance.

The Treasury has removed 72 of the 136 clauses from the Finance Bill so that they could get it through Parliament before it is dissolved ahead of the General Election.

Amongst the key proposals that have been shelved are plans to ‘Make Tax Digital’ by forcing small businesses to file multiple tax returns each year.

This was an unpopular plan as it placed a huge administrative burden on small business owners: those who earn £85,000 or more would have to file a staggering five tax returns per year.

Anita Monteith, tax manager at the Institute of Chartered Accountants in England and Wales, welcomed the moved. “This is a sensible decision by the Government," she said.

"Making Tax Digital plans remain controversial and need more scrutiny by those who will be affected, and most importantly proper parliamentary debate – a clear roadmap as to how it will work in practice is needed."

Another clause in the Finance Bill that was scrapped was a plan to reduce to the Money Purchase Annual Allowance (MPAA), but this has caused a huge amount of confusion.

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What is MPAA?

Thanks to the new pension freedoms you can access your pension fund from 55 and take a 25% lump sum tax-free.

The MPAA applies to people who have begun drawing money from their pension but also want to continue saving into it. Once you have access your pension money, the amount you can put in is vastly reduced under the MPAA.

What was happening?

Up until last month the MPAA was £10,000. That meant once you had accessed your pension you could still make contributions of up to £10,000 a year and receive tax relief on them. But, it was cut to £4,000 on 6 April.

This was an unpopular move as it would have would have left the over 55s with a much smaller annual allowance and many could have been facing tax charges if they were aware of the change.

What is happening now?

Thanks to the decision to hold a snap General Election, the Government has removed the proposed change to MPAA from the Finance Bill.

This amendment has occurred because the Government is attempting to remove anything contentious from the Bill so they can rush it through Parliament ahead of the election.

Great, so I can put £10,000 in my pension?

If you have accessed your pension pot then technically, yes, the removal of the change from the Finance Bill means you can put £10,000 into your pension this tax year without facing tax charges.

But, it might be wise to stick at £4,000.

The Government has made it clear that, if it wins the election, it will press ahead with the proposed cut to MPAA.

“Whether there is an MPAA charge is considered by reference to savings made over a tax year. Any MPAA due for 2017-2018 will, therefore, be due after the tax year ends,” says Lucy Mundy, press secretary to the Finance Secretary.

“The Government has given notice that the MPAA for 2017-18 will be £4,000.”

With that stance you would be taking a big risk by putting more than £4,000 into your pension this year, if you have already accessed it.

You could find yourself facing a tax charge at the end of the year.

“People will have already started planning for this change and a sensible approach would be to continue to do so as it may be backdated and still be applicable from 6 April this year,” Jon Greer, pensions expert at Old Mutual Wealth, told the FT Advisor.

But can the Government really remove the plan from the Bill while they try to win an election then, if they win, simply reinstate it and backdate it?

“The Treasury has created real confusion by this last minute change,” says Steve Webb, former Pensions Minister and now director of policy at Royal London.

“Savers could be forgiven for not knowing where they stand. In the normal course of things, the Finance Act would have made the limit £4,000 from 6 April 2017.

“But, as this part of the legislation has been withdrawn, you could argue that the limit is now still £10,000.”

“Obviously the present Government hopes to be in power again and has announced its intention to reintroduce this change, but it would be unreasonable to penalise savers for not being able to predict the result of the next election.

“For this reason I think the new Government should delay this change to 2018.”

The sensible approach for those who have accessed their pension is to hold off making contributions of more than £4,000 until after the election, when hopefully the picture will be a little clearer.

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