"The recent announcement of the keynote speech from the pensions minister is notable for its reference to a change of pensions tax relief. This has been something kicking around pensions circles for many years."
- David Brooks, head of policy at independent consultancy Broadstone
The agenda for the PLSA conference has hinted at incoming changes to pension tax relief at the Autumn Statement.
In the newsletter sent to members it says: “Emma Reynolds MP, Minister for Pensions will be giving a keynote address. She will discuss the new Governments plans for pensions including a Pensions Review, a Pension Schemes Bill, and a change to pensions tax relief.”
On the agenda for the website, it says: “The new Government has major plans for pensions – a Pensions Review, a Pension Schemes Bill, and much talk of a change to pensions tax relief. Find out more about the Government’s plans for pensions from the first joint HMT / DWP Minister of Pensions.”
However, a spokesperson for the PLSA told Financial Reporter the tax relief reference was due to a “drafting error”, and emphasised there had been no communication from government on this area of policy.
David Brooks, head of policy at independent consultancy Broadstone, said: “The recent announcement of the keynote speech from the pensions minister is notable for its reference to a change of pensions tax relief. This has been something kicking around pensions circles for many years.
“The government will surely want to ensure that the cost of tax relief to the exchequer is deployed appropriately and if there can be cost savings these will be important to realise. Given the complexities that may come with any new system one has to expect a consultation on implementation of this new method. This may come with some changes the language used to ensure people see the benefit to them of saving in a pension.”
Last month, Keir Starmer announced in a speech that October's Budget is "going to be painful", stating that the state of the economy is "worse than we ever imagined" after announcing a £22bn 'black hole' in the public finances last month.
The net cost of pension tax relief to the Treasury was £48.3 billion for 2021/22. Estimates from the Institute for Fiscal Studies suggest imposing a flat rate of 30% for everyone could generate £2.7-£3 billion annually.
Steven Cameron, pensions director at Aegon, commented: “Following Chancellor Rachel Reeves setting out the scale of the gap in UK’s finances, Treasury civil servants have no doubt been dusting off their analysis of how reforming pensions tax relief might increase tax receipts.
“One of the plans to move to a flat rate of pensions tax relief somewhere between the basic and higher rates of income tax, which could be argued as fair, but also has its flaws.
“A flat rate of relief of say 30% would be good news for basic rate taxpayers. Currently, every personal contribution of £80 they make receives a £20 tax relief top-up. Under a 30% rate of relief, this would be increased to £34.28 – an extra £14.28 - which over time and with compound investment growth will provide a more generous pot at retirement.
“But this would be at the expense of higher and additional rate taxpayers who would get a less generous top-up. A higher rate taxpayer paying in £80 would also see this topped up by £34.28, less generous than the current top-up of £53.33.
“Higher rate taxpayers could face a double whammy as it’s likely they’d also be required to pay income tax on employer pension contributions. This would be needed to stop employees ‘doing a deal’ with their employer to sacrifice some of their salary in return for a higher employer pension contribution. This could mean employees paying tax of 10% of employer contributions, a further £10 hit for every £100 paid by their employer.
“In some schemes, employers pay very substantial contributions. In some public sector defined benefit pensions, employer contributions can be worth 20% or more of pay. Here, an individual earning £60,000 might be benefitting from an employer contribution of £12,000 a year and could be landed with a tax bill of £1,200. We’ve already seen the pensions tax system discouraging higher paid professionals in the NHS from remaining in work, and this could have a similar effect.
“It’s right that a new Chancellor explores all options around taxation and tax reliefs. When it comes to pensions tax relief, it’s a careful balancing act between ‘fair or flawed’ or between ‘friend and foe'."
Gary Smith, financial planning partner at Evelyn Partners, added: "Rachel Reeves would not be the first Chancellor to cast an eye over the cost to the Treasury of pension tax relief.
"The nuclear option would be to scrap higher and additional rate pension tax relief and equalise down to the basic rate of 20% for everyone but this does seem very unlikely. Even equalising it at 30% would be a huge project and quite controversial, but at least it can be sold as benefitting lower earners as basic-rate taxpayers would receive a bigger uplift to their contributions.
"It would mean many savers are 'double-taxed' on both contributions and income when they access their savings, it would be problematic for public sector defined benefit schemes and would also involve taking a spanner to private sector net pay and salary sacrifice schemes.
"A flat rate of 30% might give a modest boost to the pension savings of basic rate taxpayers but let’s not forget that millions of today’s basic rate taxpayers are the higher and additional rate taxpayers of the future. As millions of workers are being drawn into higher tax bands by frozen income tax thresholds, such a step would remove the one remaining sweetener of this stealth tax rise.
"When study after study shows that people aren’t saving enough for their retirements, it seems a dangerous step to mess with tax incentives for doing so."
