Industry experts have called on the Treasury to undertake a value-for-money study on pensions tax relief after a National Audit Office report said the Government was losing track of tax relief spending.
In a scathing NAO report published last week, the Treasury is accused of failing to monitor the costs and benefits of tax reliefs.
NAO head Anyas Morse says: “The Treasury and HM Revenue & Customs do not keep track of tax reliefs intended to change behaviour, or adequately report to parliament or the public on whether tax reliefs are expensive or work as expected.
“We found some examples where HMRC and the Treasury proactively monitored and evaluated tax reliefs but in general the departments do not test whether their aims for the reliefs are being achieved. Until they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury’s administration of tax reliefs cannot be value for money.”
The new pension freedoms have sparked debate among policymakers about whether pensions tax relief needs wholesale reform in the next parliament.
MPs have also questioned whether pension freedoms could open up a pensions recycling loophole where over-55s could avoid paying National Insurance and income tax.
Centre for Policy Studies research fellow Michael Johnson says: “There is no clear analysis between tax relief and its effectiveness and that comes out loud and clear.
“Pensions tax relief is the biggest relief so it can only add to the impetus for the Treasury to conduct some proper value-for-money assessments.”
Towers Watson senior consultant David Robbins says: “Everyone is in favour of evidenced-based policymaking so the Treasury should collect information on this but it should also look at the theory of how pensions are taxed. The Treasury should not rush into tax relief changes without new analysis.
“Aside from value for money studies there needs to be some behavioural analysis as well.”
Pensions and tax specialist John Housden says: “Whoever gets in power next May will not be looking at pensions relief in terms of costs and benefits, they will only be looking at cost. It is a low hanging fruit and once we get past the election I can’t see anyone will resist it for much longer.
“To some extent, the arguments about how you measure the cost against the benefits is academic when you consider we have a £100bn deficit. Pensions tax relief and National Insurance contributions relief costs a lot and the more auto-enrolment we have then we will question whether we need all this relief. There is more stick and less carrot for savings.”
If tax reliefs are introduced with the purpose of changing behaviour, it’s really important their effectiveness is properly monitored. This National Audit Office report is pretty damning of the Treasury, suggesting it is full of new ideas but lacks the patience to follow through on policies once introduced. Evidence about the efficacy of tax reliefs could benefit government when it argues for future changes, although it could also harm their case if little impact was measured.
Martin Bamford is managing director of Informed Choice