Pension tax relief may be on the agenda ahead of autumn budget – will Rishi Sunak act?

Pension tax relief may be on the agenda ahead of autumn budget – will Rishi Sunak act?

Pension contributions can eventually receive tax relief from the government, which is provided to encourage long term planning. Under current rules, a person can get tax relief on up to 100 percent of their annual earnings.

However in practice, the relief offered can be impacted by things such as earnings, age and gender according to the Pensions Policy Institute.

In a recent report, the institute found that despite the fact that those earning less than £30,000 a year make 63 percent of all pension contributions, they are only receiving 24 percent of total tax relief.

On top of this, it was found that men are receiving a disproportionate amount of total tax relief available and those who are older or earning more get more beneficial tax relief results.

The report was wide ranging but to rectify some of the issues found, PPI detailed that a flat rate of tax relief could equalise the playing field somewhat.

The report caught the eye of experts within the field and Penny Cogher, a Pensions Partner at Irwin Mitchell, detailed that the timing could be fortuitous given coming commitments: “The PPI’s Briefing Note 122 on tax relief on defined pension contributions has been issued in good time for the Chancellor to mull over before his main autumn budget.

“We already know that this Chancellor has an imaginative approach and this is exactly what is needed to push forward the reform of pension tax.

“The PPI seem to conclude that the current system is not good for purpose in many areas. Men in employment disproportionately benefit from the current pension tax relief system compared to women – they get 71 percent of the value of this tax relief and account for 69 percent of the contributions.

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“This reflects current society- there are more men in employment at higher income levels whereas women take more time away from work for family reasons and overall earn less.

“There is also age difference in who receives the most benefit from our current tax relief system which again leads to questions of its cross generational fairness.

“Around two thirds (67 percent) of the value of tax relief on DC pension contributions goes to individuals aged in their 40s and 50s, two and a half times as much as the amount obtained by those in their 20s and 30s.”

Penny went on to examine the complicated nature of changing pension rules to create a more even landscape: “Interestingly our current system is so complex that the PPI conclude there is a very large gap between the actual cost of pension tax relief and the amount that could be claimed. This gap has been estimated at more than £750million.

“This covers both the higher and additional rate taxpayers who need to make claims through self-assessment tax returns and also the poorest i.e. the non-tax payers who have relief at source. Simplifying the system would help to ensure that more people do not miss out in this way.

“However there is still the need for some fundamental change to make the system fairer for all. Even with automatic enrolment, the proportion of pension tax relief going to those earning less than £30,000 has only increased from 23 percent to 24 percent despite the proportion of claimants increasing from 52 percent to 63 percent but the overall cost of this tax relief has more than doubled in the last 20 years.”

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Neil Hugh, the Head of Proposition at Phoenix Group, also commented on this, noting that if changes are to be made, all the relevant players will need to be consulted: “Changes made to the pension tax relief system over the years have made it very complex for savers.

“It is clear that reform is needed, but this must be done in full consultation with our industry and across both the defined benefit and defined contribution pension system arrangements in order to make things simpler for savers.

“The PPI’s report highlights that a flat rate of relief may help to simplify the system, which in turn could lead to greater engagement with pension saving.

“However, while the aim of reform should be to simplify, implementing any change is itself likely to be complex and needs to be properly considered and consulted upon.

He found that the challenges can mainly be found in three distinct areas:

The difference for employees and employers

As he explained: “Firstly, taxation of pension contributions is treated very differently for employers and employees, so any change to employee taxation needs to consider changes to the taxation for employers to avoid any unintended consequences.”

A flat rate introduction could also interfere with another pension arrangement, which would need to be addressed:

Salary sacrifice

“Secondly, many employers offer salary sacrifice arrangements under which employees ask their employer to pay contributions on their behalf, in return for a cut in salary.

“If a flat rate scheme was introduced this arrangement would need to end, otherwise those using salary sacrifice would, essentially, still benefit from full tax relief.”

Steve concluded by identifying holders of (already struggling) defined benefit schemes would also need to be taken care of:

Defined benefit pension schemes

“Finally, and most significantly, is how a flat rate of tax relief would be applied to defined benefit pension schemes.

“If overall tax relief on employee contributions fell, employer contributions would probably have to increase to enable the same benefit to be paid out.

“This would be on pension’s scheme that many employers are already struggling to support.

“These challenges should not stop the debate around the introduction of a flat rate of pension tax relief but, they certainly need to be considered before any progress can be made about changes to pension taxation if it is to achieve what it set out to do.”

Published at Sat, 04 Jul 2020 03:00:00 +0000