Recent data released by HM Revenue and Customs shows that the ‘cost’ of pensions tax relief increased by £4.4bn to £41.3bn between 2017-18 and 2019-20.
HMRC published figures on 30 September to show that gross pension tax relief in 2019-20 is projected to be £41.3bn, up from £38.2bn in 2018-19. The timing of the release of this data is interesting, given this year’s Budget takes place on 27 October 2021.
There are several reasons for the growth in the cost of pension tax relief including
- The introduction of auto enrolment to workplace pensions in 2012;
- The rise in mandatory contributions under auto-enrolment from 2% in 2017-18 to 8% in 2019-20;
- The sustained increase in the number of members contributing to a personal pension (£31.3bn was contributed to personal pensions in 2019-20, up from £27.9bn in 2018-19); and
- The annual average pension contributions per member increasing from £3,000 in 2018-19 to £3,300 in 2019-20. This is £600 more than the £2,700 average in 2017-18.
The figures also show that income tax paid on payments from private pensions increased to £19.2bn in 2019-20 from £18.7bn in 2018-19. When this tax is taken into account, the net cost to the Exchequer of pension tax relief in 2019-20 was £22.1bn, about £2.6bn higher than the 2018-19 figure.
The total value of contributions paid into personal pensions has risen over the last three years by an average of 11% each year. Whilst it is not immediately evident if this is because more people are saving for their retirement in personal pensions, as final salary pension schemes become much less prevalent, or if larger sums are being paid into the schemes, it will be ringing alarm bells at the Treasury at a time when all tax reliefs are under scrutiny by the Chancellor.
Potential implications of increasing pension tax relief costs
The headline cost of £41.3bn for pension tax relief on contributions paid into pensions may cause concern within the Government and it is entirely possible that this could become an area of interest within the Budget.
This is because concern over the increasing cost of pension tax relief may result in a budget announcement that pension tax reliefs could be reduced.
Take advice from your Pensions Adviser
Bearing in mind the timing of the publication of this data by HMRC, which clearly shows the increasing costs of pension tax relief and adds to speculation of it being a topic for the next Budget, you may wish to speak to your independent financial adviser if you are thinking of paying a lump sum pension contribution this tax year.
Should new legislation on pension tax relief come in with immediate effect on Budget day, then payments made after 27 October would be liable to any revised regulations. Whilst this may be unlikely, previous announcements of changes to tax relief on pension contributions have been accompanied by anti-forestalling legislation. As such, if you are contemplating making a one-off lump sum pension contribution in 2021-22, perhaps to utilise unused pension relief from earlier years, please consider carefully the timing of your contribution.
It is also worth noting that the lifetime allowance (LTA) charge has been frozen at it’s current level until 2025-26. The cap on tax-free pension savings is set at £1,073,100 for 2021-22. A tax charge is payable on the value of any benefits in excess of the LTA at the time they are taken. The excess over the LTA is taxed at 25% if drawn as a pension, which is taxable, or 55% if drawn as a cash lump sum.
At this stage, there is NO new legislation on pension tax relief – it is just helpful to be aware of the interesting timing of the publication of the rising costs of this relief to the Exchequer, given the announcements that further tax rises may be forthcoming in order to address the shortfall in the Government’s finances.
Should you have any queries on the issues raised in this email please get in touch with your usual M+A Partners contact or email enquiries@mapartners.co.uk.
