Pension tax relief is a £38.6 billion honeypot that may a future Chancellor may find too much of temptation to resist.
The relief is money the government pays to top up pension contributions into workplace and personal retirement savings – and cash that could be saved or diverted to pay for other services.
For the past few years, financial experts have forecast Chancellors would reduce or scrap pension contribution relief, but the tax break remains untouched … but the question is for how much longer.
Successive Chancellors have attacked other pension tax breaks with vigour.
They cut the lifetime allowance from £1.8 million to £1 million between 2012 and 2016.
Pension saving rises
The annual allowance shrunk by a fifth to £40,000 in 2014, while high earners saw a tapered allowance reduce their allowance to just £10,000.
Then, the money purchase allowance dropped from £10,000 to £4,000 last year.
The latest figures from HM Revenue & Customs show pension contributions hit a peak of £24.6 billion in 2016/17 – up £300 million from the previous year.
Analysts suspect curbing annual allowances for high earners has stopped pension tax relief spiriting too much money out of government coffers.
“While most would have expected the tax relief bill to soar as automatic enrolment continues to be rolled out to millions more employees and employers, it appears the introduction of the annual allowance taper – which reduces the pension savings incentives for higher earners – has stemmed the tide somewhat,” said Tom Selby, a senior analyst at pension and investment platform AJ Bell.
Self-employed pension worries
The figures from HMRC also reveal that tax relief on pension contributions by the self-employed are expected to stand still at £700 million, barely half of the level registered in 2007/08.
The cost of a national insurance exemption on pension contributions from employers is also increasing, says the detailed pension tax relief data.
This amount, which is separate from the main HMRC income tax relief calculations, has reached £16.2 billion. This is due to a NIC exemption on employer contributions to auto-enrolled workplace pensions.
Pension providers and savers could both do with a period of stable tax relief for a year or two so that they can plan with confidence.
