Pension tax relief cost to hit £41bn

Pension tax relief cost to hit £41bn

The cost of pension tax relief is set to hit £41bn for 2017/18, an increase of £1bn when compared to the previous financial year.

Figures released today by HM Revenue & Customs (HMRC) show a forecast of income tax pension relief of £24.1bn, which adds to £16.9bn for a national insurance exemption on pension contributions from employers.

Currently, employers have to make a minimum 1 per cent contribution to their employees’ pension, under auto-enrolment rules. These payments are exempted from paying national insurance under legislation published in 2006.

The cost with tax relief is expected to increase even further in the next few years, as the government plans to increase minimum auto-enrolment contributions, scrap the earnings band and lower the age threshold to 18-years-old.

According to Tom Selby, senior analyst at AJ Bell, “the cost of pension tax relief continues its seemingly inexorable rise as automatic enrolment drives a retirement savings revolution in the UK”.

He said: “With anaemic GDP growth putting pressure on public finances and the government desperate for funds for other areas such as the NHS, the eye-watering cost of incentivising people to save for retirement will inevitably come under the Treasury’s microscope once again.”

Nathan Long, senior pension analyst at Hargreaves Lansdown, agreed with this view.

He said: “Any increase to the cost of pension tax relief will be heavily scrutinised as it is a potential area where the Treasury could economise should Brexit events send the economy into a tailspin.

“There is not the political inclination to make such a change, but desperate times could call for desperate measures.”

Mr Selby argued that it is vital any future reforms to the system “are carried out in a measured way, taking into account the risk that cutting back pension tax relief will put people off saving and see them fall back on the state in the future”.

He is advocating that the best way to achieve this is “to establish a commission, independent of government, to take a sober look at the existing framework and propose reforms based on the long-term interests of savers”.

He said: “The recommendations of this commission could form the basis of cross-party agreement to deliver stability in the pension system – something which has been successfully delivered in other countries.”

Possible changes to the tax relief system were mentioned by several experts before the last Budget.

Sir Steve Webb, director of policy at Royal London and former pensions minister, said in October that the government might consider ending the national insurance exemption on pension contributions from employers.

The tax relief in this area is going to increase, since auto-enrolment contributions will rise in the next two years.

From April 2018, the minimum total contribution will increase to 5 per cent, with the employer paying 2 per cent.

One year later, it will increase again to 8 per cent, with the company paying 3 per cent.