Responding to the Public Accounts Committee’s report on the management of tax reliefs, the government dismissed the recommendation for HM Revenue and Customs to evaluate the impact of pension tax reliefs within the next 12 months.
This was despite concerns around HMRC's understanding of the impact of the largest tax reliefs, including pensions, which cost £38bn in 2018-19.
The Treasury pointed out it had already undertaken a number of consultations on pension tax relief in recent years, including a call for evidence on how it should be administered back in July.
It said these consultations included gathering views and evidence to understand the impact of the relief and the impact of any change.
It stated: “Responses to the 2015 wide-ranging consultation on pensions tax relief indicated there was no clear consensus for reform at that time, and so at Budget 2016 the then government announced it would not make fundamental reform to pensions tax reliefs at that stage.”
Rather than a review the Treasury said it would continue to engage with stakeholders and gather evidence but added it does "not think it is the right time now for a formal evaluation”.
It will, however, examine the tax system and identify other areas which are worthy of scrutiny.
Steven Cameron, pensions director at Aegon, said the government's statement could be interpreted in a number of ways, with some reading it as ruling out changes to pensions tax relief altogether.
He said: “Another perhaps more likely interpretation is the government is simply ruling out a formal review of the impact of pension tax relief on savings behaviours, which doesn’t rule out changing pension tax relief rules.”
The threat of changes to pensions tax relief has been on the cards for a while now as the government looks to recover its Covid-19 debts.
Earlier this year (February 10) former chancellor Sajid Javd was eyeing cutting high earner’s relief to 20 per cent.
There has also been a revival of the debate around the introduction of a 30 per cent flat rate of tax relief, or of turning the system on its head altogether so relief is given at the point of withdrawal rather than saving.
Mr Cameron said: “There is intense speculation that in a future budget, now deferred until Spring 2021, the chancellor may consider reducing the generosity of pensions tax relief as one way of getting the nation’s finances back on track as we recover from the Covid-19 pandemic.
“Those saving in pensions are doing so for the long term, to make themselves more self-sufficient in retirement, with less need to fall back on means tested state benefits.
“It’s important that they understand what tax incentives they will receive to encourage such savings. It would be particularly helpful for the government to remove any ambiguity and clarify precisely what its plans are in this area.”
Rachael Griffin, tax and financial planning expert at Quilter, warned against making rash decisions when it comes to cutting tax relief so savers aren’t unnecessarily penalised.
She said: “It is important the government don’t allow their enthusiasm for fiscal prudence to cloud their judgement. Reforming tax reliefs may save them money in the short term, but it is critical to make careful decisions to avoid any damaging long-term impacts.
“Another formal review of pension tax relief has been deemed unnecessary.
“A number of investigations have been conducted into the system of incentives for retirement saving already, and we never seem to be far away from speculation that the chancellor may pare back its generosity.”
amy.austin@ft.com
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