HMRC figures reveal the ‘gross’ cost of pension tax relief is up just over £4 billion, but LCP warn that this is not an excuse for the Chancellor to raid pensions in the Budget.
Yesterday’s publication of estimates for 2018/19 and 2019/20 for the cost of pension tax relief should not be used by the Chancellor as an excuse for a ‘raid’ on tax relief in next month’s Budget, according to consultants LCP.
Although the figures show that the gross cost of tax relief has risen from £36.9bn in 2017/18 to £41.3bn in 2019/20, a large part of the increase will have been due to the rise in mandatory contributions under automatic enrolment. These went up from 2% in 2017/18 to 8% in 2019/20. In short, the rise in the cost of tax relief reflects millions of ‘ordinary’ savers saving more, and should be celebrated rather than used as an excuse for cutting back.
The most recent figures previously available showed the total cost of income tax relief on pension savings made in 2017/18. Today’s figures provide revised estimates for 2017/18 and new figures for 2018/19 and 2019/20. They show that over the two years to 2019/20, the total gross cost of tax relief as measured by HMRC has risen by £4.4bn to £41.3bn.
Out of the total of £41.3 bn quoted cost of pension tax relief, nearly two thirds is on the contributions made by employers into occupational and personal pensions for their employees. By contrast, pension saving among the self-employed is at such a low and falling level that tax breaks on pension saving by the self-employed accounts for less than 1% of the total cost of tax relief. The statistics also include £7.3 billion because investment income generated by pension funds is not taxed within the pension pot (just like ISA savings).
The figures also show:
- The amount of tax collected from pensions currently in payment rose from £18.3 bn to £19.2 bn over the latest two years;
- The fact that employer contributions to pensions are not subject to National Insurance cost the Treasury is quoted at around £20 bn in 2019/20;
The growth in the cost of pension tax relief is affected by a range of factors, notably the increase in statutory minimum pension contributions under automatic enrolment from 2% in 2017/18 to 8% in 2019/20 which will have led to a growth in the cost of the relief. More than half of all workers brought in to pension saving as a result of automatic enrolment are estimated to have contributions made at the statutory minimum level, which means that the cost of tax relief on contributions rises significantly when minimum statutory contribution levels rise.
