Treasury’s pensions tax relief bill soars past £42bn
The costs involved with providing pensions tax relief are predicted to have increased to £42.7 billion in 2020/21, according to HMRC.
Forecasts for the 2020/21 tax year showed another steady annual rise, following estimates of £41.3bn in 2019/20 and £38.2bn in 2018/19. The 2020/21 figure of £42.7bn was split between £22.9bn in income tax and £19.8bn in National Insurance contributions.
Taxpayers receive this relief at their marginal rate of income tax, meaning those in the basic-rate band get 20% relief, rising to 40% and 45% in the higher and additional-rate bands. Meanwhile, employer contributions to occupational schemes got £21.1bn in relief during 2019/20, £8.6bn of which went to the public sector.
The data also showed that employer tax relief on contributions to defined-benefit pensions increased by £400m to £15bn over the four years to 2019/20, while tax relief on contributions to defined-contribution schemes increased £4bn to £11.6bn. The official data reignites speculation that Chancellor Rishi Sunak could be tempted once again to cut one of the Treasury’s most costly burdens.
However, the headline figure of how much pensions tax relief “costs” masks a multitude of underlying factors.
Steve Cameron, pensions director at Aegon, said:
“The figure mixes employer and employee contributions and to date, suggestions for pensions tax relief reform have focussed on employee tax relief, although moving to a flat rate might require higher-rate taxpayers to have employer contributions taxed as a benefit-in-kind to avoid a salary-sacrifice loophole. “The other major factor is defined benefit versus defined contribution [pension schemes]. “Reforms will be particularly complex for defined benefit but omitting the latter would be grossly unfair and would also significantly reduce any ‘saving’ for the Treasury.”
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