Millions of higher rate taxpayers in personal pensions and GPPs who currently fail to collect half their tax relief could see their relief automatically under a rule change floated by the Office for Tax Simplification (OTS).
This week the OTS published a short consultation on 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 be 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 as if the information was already included in their tax returns they would get this money automatically.
LCP partner Steve Webb says the proposals could cause the Government’s tax relief on pensions to soar.
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.
In its call to evidence, the OTS said: “Many people who are eligible to claim relief for certain payments, such as higher rate relief for gift aid on charitable donations or pension contributions, do not currently do so”.
The OTS was set up by the Government in 2010 to advise on ways in which the tax system could be made simpler for both individuals and businesses. Its recommendations are not binding on the government, but they have sometimes been influential in leading to changes in tax policy and administration.
The amounts involved can be substantial. Where someone pays £800 into a pension this is topped up by basic rate relief resulting in a gross contribution into the pension of £1000. But for someone paying tax at 40 per cent, a £1000 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.
If schemes were to send this data directly to HMRC so that taxpayers automatically received extra tax relief this would be a huge boost to those savers who do not currently claim the extra relief. Webb says HM Treasury may be nervous about implementing the change because it would add millions of pounds to the cost of pension tax relief.
Webb says: “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. It is to be hoped that the Government will not block an idea which would make life simpler for taxpayers and give them the reliefs which they may currently miss out on. This is also a reminder for those currently filling in their tax returns to claim the relief to which they are entitled.”