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NAPF warns Brown over tax credits

The National Association of Pension Funds expressed "deep concern" yesterday at the widely held belief that Gordon Brown, the Chancellor of the Exchequer, was planning to reduce or abolish the tax advantages enjoyed by pension funds.

Speaking at the association's annual conference in Harrogate, Ann Robinson, the NAPF's director general, warned the Government that an assault on the advance corporation tax (ACT) credit that institutions currently claim back from the Treasury would be "ill advised - a serious mistake."

The NAPF is concerned that, having promised not to raise individual income tax rates, the Government will be forced to attack the corporate sector to plug the gaps in the public finances. It is thought the Government might view the investing institutions as a more palatable target than the companies it strenuously wooed in the run-up to the election.

Currently pension funds and other tax-exempt investors receive dividends on which the company has already paid advance corporation tax at a rate of 20 per cent. The funds are able to claim this tax back from the government while the company offsets its advance payment against subsequent mainstream corporation tax bills, resulting in an overall reduction in the amount of tax collected by the government.

It is a system the NAPF defends because it argues tax is paid on the funds later when pensions are actually drawn by individual pensioners. According to Ms Robinson, "Imposing a tax on dividends to pension funds has the effect of imposing double taxation on individuals."

The cost to the government of returning tax to gross funds is estimated at up to pounds 4bn a year, making it an obvious target for a revenue-hungry government. Four years ago, Norman Lamont reduced the rate at which advanced corporation tax was paid (and refunded) from 25 per cent, raising around pounds 1bn.

The NAPF argues that abolishing or reducing the rebate might be self- defeating because it would mean profitable companies had to divert more of their retained profits into their pension funds to maintain their ability to pay promised pensions. This would lessen the apparent tax benefit to the government by reducing the amount of mainstream corporation tax it could raise from businesses.

Another side effect might be a reduction in the pension fund revenues of local authorities and other public sector employers.

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