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Pension tax relief debate on cards again as contributions hit record high

Pension tax relief is still fiercely debated as the bill increases

News that pension contributions hit record levels last year is fueling fears that the Chancellor may seek to restrict pension tax relief in his Autumn Budget.

A total of nine million people contributed £24.3 billion into personal pensions in 2015/16 according to HMRC data– a record figure.

This exceeds the £20.9 billion that was invested in pensions in 2007/08, prior to the financial crisis.

But a reinvigorated pensions market means rising costs for the Treasury. The net amount it spends on pension tax relief is £24.8 billion, a significant increase on the £21.8 billion bill prior to the financial crash. This net figure takes into account tax taken from pensions in payment.

This figure reflects the success of the auto-enrolment programme, a key part of the Government’s saving strategy. Companies setting up group personal pension schemes are included within the figures.

This had led to far greater numbers of people contributing to pension schemes. However, due to the relatively low contribution levels the average annual contribution per individual has fallen, from a peak of £3,690 in 2011/12 to £2,690 in 2015/16.

AJ Bell senior analyst Tom Selby says: “There has already been speculation that Philip Hammond will take the axe to pension tax relief in his first post-election Budget, and numbers such as these will inevitably add fuel to the fire. But it is vital that the embryonic savings culture being nurtured in the UK is not wrecked by a Treasury desperate to raise cash ahead of Brexit.”

In the past, speculation that tax relief may be restricted – particularly for higher rate taxpayers – has resulted in an increase in pension contributions ahead of the Budget.

Although previous chancellors have retained pension tax relief at 40 per for higher earners, they have sought to limit Treasury costs by restricting both annual and lifetime limits.

Selby adds: “It’s important to put the rising cost of pension tax relief in context. While a net annual bill of almost £25 billion is a scary number, the key is that average savings levels per person remain way down on previous peaks.”

He says any attempt to restrict tax relief may result in the average amount people save falling further.

“Pensions have suffered from years of chopping and changing of tax incentives. We have reached a point in time where the political sting needs to be taken out of the pension tax debate through the establishment of an independent commission.

“Such a commission could propose reforms based on the long-term interests of savers and in the process rid us of some of the horrific unnecessary complexity that exists in the current system.”


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. Why should anyone able to “earn” sufficiently to pay the higher rate of Tax need incentivising to save, We should Today, Reduce the Government Higher Rate Contribution towards these pensions and restrict all rebates to the Basic Rate, and restrict this to a limit linked to the national average wage. And yes, I do pay the higher rate off Tax

  2. Trevor Harrington 29th September 2017 at 1:52 pm

    Income tax relief on pension contributions at 40% is indefensible.

    Income tax relief at 20% for all is fine, viable, justifiable, and perfectly acceptable.

    How many billion would this save?
    Can we add the savings to the state pension payments so that we can reduce the state pension age again?

    • Not many billions at all actually Trevor, as the overwhelming proportion of total contributions on which tax relief is being granted is from companies repairing the artificial deficits on their DB schemes as a direct result of a flawed valuation metric.

  3. Worth reminding here that tax-relief is NOT the complete give-away that many will have us believe. It is the deferral of tax on income until retirement, albeit that there may be a tax-free element when benefits are drawn. And those who benefit most from tax relief now, are also those who are likely to continue to contribute most to the Treasury, even throughout retirement.

    • What you say is true but doesn’t explain the need to incentivise the better off to save. Because I earn more and pay more tax isn’t in itself reason for me to be given more tax relief than a lower earner – quite the opposite perhaps?

      Should tax reliefs be offered to try to get everyone to stand on their own two feet, or to make high earners even more comfortable?

    • For many HRT payers, the present system of tax relief on pension contributions isn’t a deferral of ALL the income tax that would otherwise be payable now.

      Consider someone who’s a HRT payer during their working life but who, upon retiring, becomes a BRT payer. They’ll have had HR tax relief on their pension contributions but will have to pay only BR tax on their pension income.

      Also, assuming such people reinvest their PCLS into an ISA (and another one in the name of their spouse), all income drawn from that will be free of any tax at all.

      Whilst that may be a very good deal for HR tax payers, it’s no more than basic and entirely legitimate tax planning. There’s nothing immoral about it.

      Also, some people will still be HRT payers after they retire, not to mention the progressively reduced AIA, particularly for higher earners, and the progressively reduced LTA.

      For the government to unify the rate of tax relief allowable on pension contributions to 20% for all would, in my view, be an unwarranted further attack on HR tax payers who are already subject to more than enough restrictions.

  4. 45% Gross Tax Relief = 81.81% HMRC addition to net contribution
    40% Gross Tax Reliewf = 66.66% HMRC addition to net contribution.
    20% Gross Tax Relief = 25% HMRC addition to net contributtion
    Retirement income tax is 20% after 25% PCLS = 16% in reality.
    And people are asking whether Govt (we) can afford a) The State Pension and b) the Triple Lock.
    At least make it 25% gross relief (33.33% HMRC Addition) for all if 20% is not acceptable politically!

  5. Okay, by way of tax relief on pension contributions, the Treasury now foregoes £24.8Bn in tax revenues. But what’s wrong with that? Isn’t it a direct reflection of the success of the government’s stated objective of encouraging more people to set aside more of their otherwise taxable income towards independent financial security in retirement?

    More pension contributions = more tax relief. For the government to reduce (still further) the amounts of tax relief available just because people have done what the it’s been urging them to seems wholly unjust.

  6. Most of you are missing the elephant in the room. HRT relief is a minnow in the tax relief ocean compared to the whale of tax relief granted to the massive contributions being paid by UK companies to repair their artificial DB scheme deficits.
    The easiest way for the Treasury to reduce the tax relief bill would be to legislate a more realistic way of valuing DB scheme liabilities.

  7. Robert Milligan 2nd October 2017 at 2:38 pm

    Abolish the whole Pension system I say, we have ISA’s & LISA’s both Tax Fee, one even gets tax relief, with conditions! but why on earth do we need pensions,

  8. Umm….abolish pension system in favour of ISAs….which people will potentially put less into, access it whenever they want like a bank account, not leave enough for retirement and if they do have any left on death, possibly be subject to IHT.
    It’ll then only be the better off (HRT) that can afford to save into an ISA, so people will claim they are favouring the well off again.
    And around we go again……

  9. Paying more to tax relief is unfortunately considered a “Cost” by the treasury mandarins (most of whom are doing very well pensions wise thanks very much) and they would dearly love cull the level being paid, not to repair the retirement savings of the poor but for the short term gain of the current government. In addition publishing the actual split in DB funding and DC payments would really show where we are spending most of our money.

    It is difficult to square the wheel with well paid and pensioned public servants having their own assessment made with no relevance to current funding costs deciding upon the rest of us whose position is in no way so fortunate. Many of those Higher Rate Tax payers were not this throughout their lives and in many cases need to make up the lack of investment made in this area when they were too busy building businesses and employment for others.

    Replacing Pensions with ISAs and LISAs is obviously a preferred government route due to the lack of, in the main, up front cost providing more to the government now. This is however again in exchange for less tax many years in the future. The drawbacks are considerable, can we trust government not to change the rules in future? Can we trust employees not to draw everything out before retirement? History says no.

    Perhaps legislating for no public servant to have more than say a pension of £40kpa would be more helpful.

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