Pensions tax relief to cost £40 billion

New figures from HM Revenue & Customs (HMRC) show that pensions tax relief will cost the Government almost £40 billion this year, which is an increase of more than £2 billion on last year.

HMRC’s statistics show that tax relief on employee pension saving is set to rise to £21.2 billion, while the tax giveaway on employer contributions to occupational pension schemes reached more than £18 billion.

The increasing cost of providing pensions tax relief follows a surge in the number of employees paying into company retirement schemes. In 2017-18, 10.4 million individuals contributed to a registered pension scheme, which was up from 9.4 million in 2016-17.

However, while the numbers rose, the average level of contributions fell, leaving the bulk of tax relief to be claimed by higher-rate taxpayers, who pay 60p from every £1 of a pension contribution, compared with standard-rate taxpayers who must pay 80p for every £1 of pensions saving.

The Government offers tax reliefs to influence individual and corporate behaviour. However, critics claim that many tax reliefs are unfair and skewed towards wealthier households, even though it is low earners who need more help. As one commentator pointed out, pensions tax relief rewards higher-rate taxpayers at the expense of those who are younger and on lower incomes.

The Government’s independent adviser, the Office of Tax Simplification (OTS), has suggested reviewing pension tax reliefs, as the practice of over-55s ‘double-dipping’ on them is not producing a fair result for some.

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