TaxOct 10 2019

Cost of pension tax relief rises to £39.9bn

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Cost of pension tax relief rises to £39.9bn

Income tax relief on pension contributions is expected to cost the government £21bn this year, with national insurance relief to hit £18.7bn, according to official figures.

Latest data from HM Revenue and Customs, published today (October 10), showed income tax relief on pension contributions is estimated to cost £21.2bn in 2019/20, up 4 per cent from £20.4bn in the previous year.

Tax relief on pension contributions is paid at the saver's marginal rate of income tax, meaning basic rate taxpayers get 20 per cent pension tax relief, increasing to 40 per cent for higher-rate taxpayers and 45 per cent for additional-rate taxpayers.

HMRC also estimated that national insurance tax relief for employers and employees on their pension contributions will cost £18.7bn this year, up 7 per cent from £17.4bn in 2018/19.

Stephen Lowe, group communications director at Just, said tax relief should not be viewed as a cost to the taxman as it benefits taxpayers in the long-term.

Mr Lowe said: “Cost is a short term way of looking at it because really this describes investment in the living standards of our future retirees.

“It’s unfortunate we have to describe pension tax relief as a ‘cost’ on society because it immediately suggests it's a burden on the taxpayer.

“Relief from tax is a core incentive to encourage people to think long term and reduce the burden on future governments.”

HMRC did not explain why it expects tax relief costs to increase.

But David Robbins, director at Willis Towers Watson, said: “Factors pushing the numbers up include higher employer contributions in public sector schemes – because the governments treats not making employees pay tax upfront on these contributions as part of tax relief, higher employment, and higher minimum contributions under automatic enrolment.  

“Pushing the other way are the ongoing decline in the number of private sector employees in expensive defined benefit schemes, a higher 40 per cent tax threshold, and – at least under current policy – a tapered annual allowance that is biting harder from 2019/20 because high earners can no longer carry forward unused allowances from the days when they could still save up to £40,000 a year.”

Mr Robbins said the official estimates were not a meaningful measure of the impact of tax relief.

He said: “They don’t measure the incentives provided by the current tax treatment of pensions relative to saving in other ways – if that’s what they were trying to show, they would net off the tax they expect to collect when today’s contributions are withdrawn, not the tax being paid by today’s pensioners.