Reform may be coming to pension tax relief

August 9, 2018

The way pension tax relief works is reportedly under review by the Treasury.

The apparent proposal is focused around a new flat rate of tax relief of 25% on pension contributions, regardless of personal income tax rates. Under this scheme, a gross pension contribution of £100 would require the same of everyone – a net outlay of £75 rather than the current £80. Pension tax relief is currently given based on your personal income tax rate, which means most people get basic rate relief at 20%, but high earners can get 40% or 45%.

The 25% rate would be a tax cut, in effect, for anyone paying only basic rate tax, but could also potentially save the Exchequer around £4 billion a year. Increasing the flat rate to 28% would cost the Treasury the same as today’s mix of 20%, 40% and 45% reliefs, according to estimates from the Resolution Foundation.

With the government looking for an extra £20.5 billion in funding for the NHS, it isn’t surprising that pension reliefs are under consideration. Tax relief on pension contributions cost the Exchequer £38.6 billion in 2016/17, according to HMRC’s latest estimate, as well as over £16.2 billion of national insurance contribution (NIC) relief on employer contributions.

The government has eroded the value of pension relief over recent year by reducing the annual allowance: it is now £40,000, but in 2010/11 was as high as £255,000. While these more radical changes to tax relief would be politically sensitive – and the Chancellor has already experienced a backlash after his proposed increase of NICs in 2017 – the Treasury Select Committee has recommended the government give it “serious consideration”.

With the government needing to find money from somewhere, and more voices calling for a move away from full tax relief, a significant change to pension reliefs may be inevitable.

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