Cost of pension tax relief steady at £38.6bn

Cost of pension tax relief steady at £38.6bn

The overall cost of tax relief rose only by £100m in the last fiscal year, stabilising at £38.6bn in 2016 to 2017, according to data published today (28 February) by HM Revenue & Customs (HMRC).

More than half of this cost (£18bn) is related to contributions made by employers, particularly into defined benefit (DB) schemes.

These plans are almost all closed to new members, which means these contributions are made to help meet the increasing cost of past pension promises.

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With the introduction of auto-enrolment in 2012, the cost of tax relief with personal pension contributions is increasing every year, reaching £6.5bn in 2016 to 2017.

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.

HMRC figures also show that tax relief from self-employed contributions are expected to stand at £700m, barely half of the level registered in 2007/08.

The taxman's data also showed that the cost of a national insurance exemption on pension contributions from employers is increasing.

This value, which is separate from the main HMRC income tax relief calculations, has now reached £16.2bn.

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.

From April 2018, the minimum total contribution – currently at 2 per cent - 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.

According to Sir Steve Webb, director of policy at Royal London and former pensions minister, "successive chancellors have viewed pension tax relief as a 'honey pot', convenient to dip into whenever they are short of money".

He said: "But pensions should be a long-term business, and six cuts in the last seven years simply undermines confidence in the system.

"It is time that the chancellor committed to no more changes to tax relief for the rest of this Parliament, especially now that the cost of tax relief has stabilised, so that people can plan with confidence.

"Instead, there needs to be a focus on the self-employed whose level of pension saving remains worryingly low."