What do HMRC stats say about people accessing their pensions?

Members contributing have fallen steeply from 5.61mn down to 3.18mn. The most probable explanation is the effect of Covid on working and pension saving. And the hope is that the data for the next few years will show an increase in the number of members contributing.

The cost of tax relief

The cost of tax relief and whether it is encouraging adequate pension saving is a perennial area of discussion.

Interestingly though the figures are all estimates, the authors of the data release only show the figures for the two most recent tax years – 2019-20 and 2020-21. Improvements in methodology have, apparently, made the previous years’ figures unusable.

Both tax relief and national insurance contribution relief increase from 2019-20 to 2020-21. The cost for both increased by nearly 7 per cent to £67.3bn. On its own tax relief rose by £3bn to £44.1bn.

The volume of individuals facing tax charges for breaching those limits illustrates why careful planning is so important. 

It is worth remembering, though, that millions more people are saving for retirement, with auto-enrolment in particular dramatically increasing the number of savers in the UK in recent years. And so increases in tax relief costs reflect the new pension savers that are being created, and who are benefitting from relief on their contributions.  

The release goes on to ‘slice and dice’ exactly where that income tax relief is being targeted. The biggest proportion is £20.9bn, equivalent to almost half, which is applied on employer contributions to net pay schemes. Tellingly, only £1.1bn – the smallest proportion – is given to self-employed contributions, a slight increase from £900mn the previous tax year.

HMRC also considers which types of taxpayers receive the most pensions tax relief. As shown below, in the 2020-21 tax year, the biggest chunk goes to the higher rate taxpayer. It is a statistic that will, again, add fuel to the fire for those that believe the government should pursue a more equitable system of pension tax relief. 

Charges raised through the annual allowances and lifetime allowance

HMRC applies charges if pension savers exceed their annual allowances or lifetime allowance. The volume of individuals facing tax charges for breaching those limits illustrates why careful planning is so important. 

Since their introduction, the funds raised by these four levers (the three different annual allowances and one lifetime allowance) has increased steadily over time. 

Policymaking would be easier if the charges raised were split out according to each allowance, providing greater transparency.

However, the tax year 2020-21 saw a drop off in the level of annual allowance charges. The number of reports of contributions exceeding the annual allowance fell to 58,130, down 12 per cent on the previous year.