Pension tax relief ‘cost’ hits £42bn
The ‘cost’ of pensions tax relief increased by £4.4bn to £41.3bn between 2017-18 and 2019-20, data from HM Revenue and Customs has shown.
According to figures from the tax authority, published yesterday (September 30), gross pension tax relief in 2019-20 is projected to be £41.3bn, up from £38.2bn in 2018-19.
Tax relief on pension contributions is paid at the saver's marginal rate of income tax, meaning basic rate taxpayers get 20 per cent pension tax relief, increasing to 40 per cent for higher-rate taxpayers and 45 per cent for additional-rate taxpayers.
However, pension commentators have said a large part of the increase will have been due to the rise in mandatory contributions under automatic enrolment.
These went up from 2 per cent in 2017-18 to 8 per cent in 2019-20.
Therefore, the rise in the cost of tax relief reflects savers saving more, and should be celebrated rather than used as an excuse for cutting back, according to LCP.
Karen Goldschmidt, pension tax specialist at consultants LCP, said: “The chancellor will undoubtedly be looking with great interest at the quoted headline figure of £41.3bn for the ‘cost’ of pension tax relief. But these figures provide no excuse for a Budget raid on pension tax relief.
“The growth reflects millions more workers savings towards their retirement and should be welcomed, not used as an excuse for cuts.
“In addition, a large part of the headline cost of tax relief relates to the cost of public service schemes, where a reduction in relief would either result in big tax bills for public servants or generate little up-front revenue for the government.”
The figures also showed tax paid on pension incomes increased from £18.7bn in 2018 to £19.2bn in 2019.
When tax on pension incomes is taken into account, the net cost of pension tax relief in 2019-20 was £22.1bn, about £2.6bn higher than the 2018-19 figure. HMRC found £31.3bn was contributed to personal pensions in 2019-20, up from £27.9bn in 2018-19.
The total value of contributions to personal pensions has risen over the last three years by an average of 11 per cent each year.
Meanwhile, the figures showed 42,350 taxpayers reported pension contributions exceeding the annual allowance with a total of £950m in 2019-20, up from £820m a year earlier.
In addition, 8,510 lifetime allowance charges were reported by pension schemes in 2019-20, with a total value of £342m, a 21 per cent increase from £283m in 2018-19.
Andrew Tully, technical director at Canada Life, said: “These figures show a significant increase of 21 per cent in the lifetime allowance
charge for the latest reported tax year, with 8,500 people hit with an extra tax.
“I can only see this charge hitting more people as those using drawdown approach age 75 and face the second check, which will be exacerbated by the fact the allowance has been frozen for the next five years.”
Tom Selby, head of retirement policy at AJ Bell, said: “The amount raised by the annual and lifetime allowances in the context of the UK’s finances is relatively small, with horrific complexity in the retirement system the price we all have to pay.
“The decision to freeze the lifetime allowance at £1,073,100 until the end of this Parliament will inevitably drag more people into paying lifetime allowance charges, further boosting Chancellor Rishi Sunak’s coffers.
“Hiking the point at which the annual allowance taper kicks in by £90,000 from 2020/21 onwards, on the other hand, will reduce the amount of cash the Treasury nets from pension savers.”
Credit - Amy Austin - Financial Times - https://www.ftadviser.com/pensions/2021/10/01/pension-tax-relief-cost-hits-42bn/