‘Autumn’ Budget: Is pensions tax relief back on the Chancellor’s radar?
8th October, 2020
At the time of writing, two announcements imply that there will be no changes to our marginal rate relief system for pensions tax relief – at least, in the short-term.
Firstly, in light of the ongoing global pandemic, HM Treasury has cancelled the Autumn 2020 Budget. It is expected, however, that a spending review will take place before the end of the year.
Secondly, the Public Accounts Committee’s recommendation that HMRC should conduct a review into the impact of pensions tax relief has just been ruled out by the government. HM Treasury said the government had already undertaken several major consultations on aspects of pensions tax relief over the last few years. However, the government did back a number of the Committee’s other recommendations – including that HMRC should publish data showing who is really benefiting from pensions tax relief.
Does this mean that higher and additional rate tax-payers can assume that they will continue to receive 40% or 45% relief on their pension contributions beyond 2021/22?
That assumption may be a little premature.
Well, in more normal times, total government receipts in a tax year are circa £800bn with most of the tax-take coming from Income Tax, National Insurance Contributions and Value Added Tax, as illustrated in the following diagram from a Parliament Briefing.
Consequent upon Covid-19, there is a £130bn back hole – budget forecast of around £800bn and latest forecast of £670bn. In addition, central government spending so far in 2020-21 is 36 per cent higher than in the year 2019-20 and net debt rose by 20.4 per cent of Gross Domestic Product on a year earlier. In cash terms, net debt has hit £2 trillion for the first time ever.
When options are being considered to help get us out of this black-hole, will pensions be viewed as a soft-target?
Speculation that pension tax relief reform is being considered is certainly as intense as I have seen it in recent times. And when you consider that the cost of tax relief is £40bn per annum (ignoring National Insurance relief on pension contributions) abolition of higher and additional rate relief could make a material difference to government receipts of around £10 billion in each tax-year.
Also, another reason for believing that the government may be serious about reform this time, apart from the fact that many taxpayers do not understand the current marginal rate relief system, is that most of the pension tax reliefs go to higher earners.
So, part of the rationale for reform would undoubtedly include arguments around fairness and equity.
How change would apply to the growing number of schemes where member contributions are made by salary sacrifice, I do not know apart, of course, from abolishing all new salary sacrifice.
In any case, notwithstanding the recent government announcements and the complexities of implementing any change to pension tax reliefs, there is plenty of evidence to indicate that there could be something on pensions in the Budget, whenever that might be, and it may not be the news that many pension savers want to hear.