AJ Bell’s Selby: public sector workers receive almost two-thirds of £5.4 billion employee pension tax relief

Tom Selby, senior analyst at AJ Bell
Tom Selby, head of retirement policy, AJ Bell

-Public sector employees saving in generous defined benefit (DB) schemes benefitted from £3.3 billion of pension tax relief in 2019/20, while private sector employee relief was £2.1 billion, new HMRC analysis reveals (Estimated cost of tax reliefs statistics – GOV.UK (www.gov.uk))

-Employer contributions to occupational pension schemes received £21.1 billion of tax relief in 2019/20, with £8.6 billion of this going to the public sector

-Exactly half (50%) of individual pension contributions in 2019/20 received tax relief at the higher or additional rate

-In 2020/21 an estimated £42.7 billion was spent on pension tax relief overall with come tax relief estimated at £22.9 billion and National Insurance Contributions relief estimated at £19.8 billion

-However, when tax paid on pensions in payment is taken into account this figure drops to £22.9 billion

Tom Selby, head of retirement policy at AJ Bell, comments: “The raw ‘cost’ of pension tax relief is always going to appear eye-watering, and the 2020/21 estimate of over £42 billion certainly falls into that category.

“It’s worth noting that this number doesn’t include money received by the Treasury via income tax on pensions in payment. When that is taken into account, the net cost of pension tax relief in 2020/21 was estimated at £22.9 billion in 2020/21, with an expectation this figure will fall to £22.5 billion in 2021/22.

“What is often missed in analysis of pension tax relief – in particular by those who eagerly push for radical reform such as scrapping higher-rate relief – is how that relief is distributed.

“Dealing with DB schemes – the majority of which now reside in the public sector – has always been the biggest challenge to seismic pension tax relief changes both practically and politically, and these figures lay that challenge bare.”

Public sector workers scoop the lion’s share

“Public sector workers in defined benefit schemes scooped up £3.3 billion of employee tax relief in 2019/20, compared to £2.1 billion for private sector workers, most of whom now save in defined contribution (DC) pension schemes.

“Employer pension tax relief also represents a huge chunk of the overall bill, accounting for over £21 billion in 2019/20, with £8.6 billion of this going to the public sector.

“Any reform to pension tax relief would again have to answer questions around how employer relief would be dealt with. It would also effectively represent a tax hike for higher earning public sector workers, including doctors, dentists and senior teachers.”

Addressing a retirement savings crisis

“At a more fundamental level, the fact pension tax relief costs have risen in recent years also in part reflects the success of automatic enrolment, and so should be welcomed.

“The pandemic has understandably dominated the national conversation for the past 2 years but ensuring the UK’s ageing society save enough for retirement remains arguably the greatest public policy challenge of modern times.

“Pension tax relief is simply an investment in ensuring future generations are more able to provide for themselves in later years and therefore less likely to fall back on the state.”

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