The cost of pension tax relief has gone up from £36.9bn in 2017/18 to £41.3bn in 2019/20, an increase of 12 per cent in two years, according to estimates published by HMRC today.
LCP says the rise is due to mandatory contributions increasing by 8 per cent in 2019/20 from 2 per cent in 2017/18 under automatic enrolment. This has boosted the cost of pension tax relief and reflects a growing number of people saving. But LCP experts say it should not be used as an excuse by the chancellor to cut tax relief on pension savings in the budget.
Almost two thirds of the estimated cost of pension tax relief is attributed to contributions made by employers into occupational and personal pensions for employees. Just 1 per cent of the estimated figure accounts for those who are self-employed, a number that continues to fall. As a result of automatic enrolment, the cost of tax relief on contributions are bound to rise along with minimum statutory contribution levels.
LCP pension tax specialist at consultants Karen Goldschmidt says: “The Chancellor will undoubtedly be looking with great interest at the quoted headline figure of £41.3 billion for the ‘cost’ of pension tax relief. But these figures provide no excuse for a Budget raid on pension tax relief. The growth reflects millions more workers savings towards their retirement and should be welcomed, not used as an excuse for cuts.
“In addition, a large part of the headline cost of tax relief relates to the cost of public service schemes, where a reduction in relief would either result in big tax bills for public servants or generate little up-front revenue for the government. The tax relief figure also includes the vital contributions which firms are making to cover the shortfalls in their pension schemes which the government should be encouraging rather than taxing more heavily. Overall we need more pension saving, not less, and a raid on pension tax relief would send entirely the wrong signal to millions of people who have just started out on their pension saving journey”.
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