The statistic that shows pension tax relief is ripe for reform

Here’s why, at some point down the line, pension tax relief will be tinkered with.

For the past couple of years there have been concerns the government would turn to pensions in order to fund future spending pledges, and the latest tax statistics show why that is likely to happen.

The figures show the net cost of pension tax relief is forecast to reach £43.7 billion in the 2018-19 tax year, up from £41.7 billion the previous tax year. For the 2018-19 tax year, £25.6 billion is derived from registered pension schemes, while the remaining £18.1 billion is the total cost of employer National Insurance relief.

While this increase is small in percentage terms, when the cost of pension tax relief today is compared with that five years ago (when it stood at £33.5 billion in the 2013-14 tax year) the difference is stark. Over five years, pension tax relief has increased by 30%.

The key driver over this period has been the introduction of automatic enrolment, the government initiative introduced in October 2012, which has resulted in a record number of people (around 10 million) saving for later life through a pension scheme at work. 

In short, the pension tax relief system has become increasingly expensive. It is therefore feasible that today’s government or a future government will look to reform the existing system in order to control costs and free up cash to be used elsewhere, such as the NHS.

Moreover, reform will address a system that favours the wealthy, as higher-rate and additional taxpayers gain the biggest tax relief on contributions.

Speculation mounted ahead of the November’s Budget that chancellor Philip Hammond would tinker with pension tax relief, but this did not materialise.

Sean McCann, chartered financial planner at NFU Mutual, says: “Hammond (ahead of the Budget last year) described tax relief on pensions as ‘eye-wateringly expensive’ and it’s almost certainly going to remain in his sights for some time. We could see some changes announced before the end of 2019.

“The multi-billion pound surge in cost will partly be due to the roll out of automatic enrolment, where employees are added to workplace pension schemes by default. While pension contributions are typically low, the sheer numbers involved will have made a difference.”

Tom Selby, senior analyst at AJ Bell, notes that while rumours of radical tax relief reform will inevitably surface once again in 2019 – particularly in the event of a no deal Brexit – policymakers need to consider the impact any changes would have on the savings culture being fostered in the UK as a result of automatic enrolment.

He says: “Tax relief is one of the key incentives offered to savers in return for locking their money away until age 55. Raiding tax relief to fund short-term spending could cause people to reconsider the value of this deal, potentially reducing savings levels and storing up more problems for the future.

“Savers should be asking themselves whether they are getting their fair share of this £40 billion government giveaway and consider increasing their pension contributions if not.”


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