Tax policy on directors' pensions challenged

The Inland Revenue is facing a legal challenge over a new practice of imposing a 40 per cent tax charge on lump sum pension payments made to directors who retire early but continue to work for the company. Separately, pension actuaries warned interest rates under EMU would be driven up unless Europe's trillion-pound pension liabilities were addressed. Andrew Verity reports.

The pensions industry is preparing to seek a judicial review over the Inland Revenue's practice of taxing lump-sums previously thought to be tax-free. The practice, which the industry believes is part of the Government's "spend-to-save" clampdown on tax loopholes, has led to many directors of small companies paying unexpected six-figure sums in tax.

The Revenue's Pension Schemes Office is targeting directors who retire and draw pension benefits, but stay on the board in a reduced role - usually as a non-executive director or as a consultant.

The Revenue claims this breaks rules that bar people from working once they have drawn their pension benefits from company schemes. It is applying the practice even to unpaid, non-executive directors.

The Association of Pensioner Trustees, which represents trustees of small company pension schemes, is preparing to mount a legal challenge over what it claims is an un-announced change of practice.

Further, the Revenue has told the APT that the practice is universal and could apply to any member of an occupational pension scheme who retires early but then resumes working for the same employer. Potentially, any employee who, after drawing a tax-free lump sum, stays on the pay-roll could be hit with a retrospective tax charge.

The APT says that while the Inland Revenue claims the practice is universal, it is also targeting directors of small companies, many of whom stay on the board purely to hand over the reigns to successors.

In one example, a director of a packaging business, who asked not to be named, retired in 1992 with a lump sum payment of more than pounds 400,000. He had remained on the board while the company was being wound-down. Adrian Waddingham, of actuaries Barnett Waddingham, said: "I have complained to the Revenue that the only cases that have been brought to my attention are controlling directors. But the Revenue has told me this does apply to larger companies. There are countless examples of directors retiring early but working for them later."

While the Revenue insists it has not changed its practice, the rules are by no means universally applied. Gillian Shepherd, the former education minister, said when still in government that she "had no objection" to teachers retiring early and then resuming work for their education authority. Lump sums have remained tax-free.

In a separate development, the Association of Consulting Actuaries warned that interest rates would rise under EMU if governments did not address the issue of unfunded pension liabilities.

The issue caused a great deal of controversy following a report from the House of Commons select committee, led by then-backbencher Frank Field. Mr Field, now minister for welfare reform at the DSS, said before the election that he believed it made no economic sense for Britain or any other country to join a single currency.

Paul Thornton, chairman of the association, warns that EMU convergence criteria fail to account for the liabilities, which across Europe amount to more than pounds 1,000bn. While Britain has more than pounds 750bn in funded pensions, Italy, France, Germany and Spain have giant future liabilities because of generous benefits paid for from taxes.

PROMOTED VIDEO
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
News
Lizards, such as Iguanas (pictured), have a unique pattern of tissue growth
science
Extras
indybest
News
Anna Nicole Smith died of an accidental overdose in 2007
people
Life and Style
food + drink
Arts and Entertainment
'The Great British Bake Off' showcases food at its most sumptuous
tvReview: Bread-making skills of the Bake Off hopefuls put to the test
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Test Lead (C#, Java, HTML, SQL) Kingston Finance

£40000 - £55000 per annum: Harrington Starr: A Global Financial Service Organi...

Access/Teradata Developer, Banking, Bristol £400pd

£375 - £400 per day: Orgtel: Access / Teradata Developer - Banking - Bristol -...

Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

£45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

Application Support Engineer (C++, .NET, VB, Perl, Bash, SQL)

Negotiable: Harrington Starr: Application Support Engineer (C++, .NET, VB, Per...

Day In a Page

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home