‘Cost’ of pensions tax relief rises to £41.3bn; industry warns against Budget raid

The cost of pensions tax relief increased by £4.4bn to £41.3bn between 2017/18 and 2019/20, figures from HMRC have revealed.

Of the total cost, almost two-thirds (£26.6bn) was on the contributions made by employers into occupational and personal pension schemes, while tax relief on contributions by self-employed workers made up less than 1 per cent (£200m).

Tax relief on contributions by employees to occupational and personal pension schemes totalled £7.2bn in 2019/20, while pensions tax relief on investment income of pension funds was £7.3bn.

HMRC’s figures, which include revised estimates for 2017/18, also showed that the amount of tax collected from pensions in payment increased from £18.3bn to £19.2bn over the two years.

Although the cost of pensions tax relief had increased, LCP noted that the rise was due in large part to the increase in the mandatory minimum contribution rate from 2 per cent in 2017/18 to 8 per cent in 2019/20.

“The Chancellor will undoubtedly be looking with great interest at the quoted headline figure of £41.3bn for the ‘cost’ of pension tax relief,” commented LCP pension tax specialist, Karen Goldschmidt.

“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 Pensions and Lifetime Savings (PLSA) also recently warned the government against pension tax reform in its list of pension policy recommendations.

Based on work carried out by the PLSA in July 2021 and the new figures from HMRC, LCP estimated that around a seventh of the pensions tax relief bill related to contributions made by companies to clear defined benefit (DB) scheme deficits.

Furthermore, around a third of the cost related to public sector DB schemes, according to LCP, mostly on employer contributions, due to there being no ‘pot’ for unfunded public sector schemes to pay into, unlike in the private sector.

The consultancy warned that cuts to pensions tax relief could undermine pension saving.

“The tax relief figure also includes the vital contributions which firms are making to cover the shortfalls in their pension schemes which the government should be encouraging rather than taxing more heavily,” Goldschmidt added.

“Overall, we need more pension saving, not less, and a raid on pension tax relief would send entirely the wrong signal to millions of people who have just started out on their pension saving journey."

LCP also noted that the way the cost of tax relief is calculated is “open to question” and that HMRC had acknowledged that its figures were “subject to large revisions and have a wide margin of error”.

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