OTS proposals could see pension tax relief bill soar

OTS proposals could see pension tax relief bill soar

Higher rate taxpayers in personal pensions who currently fail to claim additional tax relief could see this automatically handed to them under proposals by the Office for Tax Simplification.

In a consultation, the government body considered whether information from ‘third parties’ such as pension companies could be sent directly to HMRC and inserted into the tax returns of taxpayers, avoiding the need for them to supply the information themselves.

This could cause a “big boost” for those who pay higher rate tax and who often fail to claim the additional tax relief that is due to them on pension contributions or charitable donations.  

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If the information was already included in their tax returns they would get this money automatically.

But this could cause the government’s tax relief bill to soar at a time when there have been rumours the government is looking to cut this bill to pay off its Covid-19 debts.

At present, when a member of a personal pension pays money into their fund, they do so out of their after-tax income.  

Their pension provider then claims basic rate relief on all contributions, regardless of the actual tax rate paid by the member.  

Those who pay higher or additional rate tax can get extra tax relief but only if they claim it via their tax return.

Steve Webb, former pensions minister and partner at LCP, said the amounts involved can be substantial.  

For example, where someone pays £800 into a pension this is topped up by basic rate relief resulting in a gross contribution into the pension of £1,000.  

But for someone paying tax at 40 per cent, a £1,000 gross pension contribution should generate £400 of tax relief, not just the £200 which the fund has claimed. The taxpayer will only get the other £200 if they claim it.

Sir Steve said if schemes were to send this data directly to HMRC this would be a huge boost to those savers who do not currently claim the extra relief.  

Sir Steve said: “It is a well known problem that many people who put money into a personal pension fail to claim the higher rate tax relief to which they are entitled.  

“Making this happen automatically via data sharing between the pension provider and HMRC would streamline this process and help more people appreciate the benefits of saving into a pension.  

“But what is good for the saver may be regarded as bad news by the Treasury who would fear that the cost of tax relief could soar.”

The threat of changes to pensions tax relief has been on the cards for a while but resurfaced as the government looks to recover its Covid-19 debts. 

Last year then-chancellor Sajid Javd considered 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.