Pension tax relief review ruled out – for now

Frank Fraser

Frank Fraser

Financial Planner

The government has recently announced that current pension tax reliefs will continue as they are, despite pressure from MPs over a £38bn expense.

The Committee of Public Accounts (PAC) recommended that HM Revenue and Customs (HMRC) should review the impact of pension tax reliefs in the next 12 months, but the government has disagreed.

The PAC has reported that it is ‘concerned’ that HMRC ‘does not understand the impact of any of the largest tax reliefs, including reliefs on pensions that were forecast to cost £38bn in 2018-2019’.

In response, the Treasury explains that several consultations on pension tax relief had been carried out in recent years, including back in July, when there was a call for evidence on how it should be administered. These consultations included gathering views and evidence in order to understand the impact of the relief and any associated change.

It stated: “Responses to the 2015 wide-ranging consultation on pensions tax relief indicated there was no clear consensus for reform at that time, and so, at Budget 2016, the then government announced it would not make fundamental reform to pensions tax reliefs at that stage.”

Rather than a review, the Treasury said it would continue to engage with stakeholders and gather evidence but added it does, "not think it is the right time now for a formal evaluation”. It will, however, examine the tax system and identify other areas which are worthy of scrutiny.

The statement made by the government could mean that changes to pensions tax relief are being ruled out altogether. Perhaps a more likely outcome is that the government is ruling out a formal review of the impact of pensions tax relief, but not ruling out changing the rules in the future.   

The reality is that the threat of changes to pensions tax relief is ever present as the government looks at ways to recover its COVID-19 debts.

Current pension tax relief in Scotland involves making a net payment into your pension plan and the pension provider reclaims 20% relief from HMRC (even if you have only paid 19% tax).

If you pay tax at higher rates you claim further relief on your self-assessment tax return:

  • 1% up to the amount of any income you have paid 21% tax on
  • 21% up to the amount of any income you have paid 41% tax on
  • 26% up to the amount of any income you have paid 46% tax on

In February this year, former chancellor Sajid Javid was considering reducing high-earners pension tax relief to 20%.

There has been a recent return to discussions about the possible introduction of a 30% flat rate of tax relief, or of a total change, whereby relief would be at the point of withdrawal rather than contribution.

There is also speculation that in the next budget, now deferred until Spring 2021, that the chancellor may consider reducing pensions tax relief as part of the plan to get the UK’s finances back on track as we recover from the pandemic. 

The government has stated that in the next three months, it should establish and publish the criteria it will use to determine which pension tax reliefs to evaluate in the future.

All of us who are saving through pensions are doing so to provide for our own future, so it is vital we understand which tax incentives we will receive, enabling us to invest with confidence.

We can only hope that the government acknowledge this and explain clearly what its plans will be for the future to remove the ongoing uncertainty. Meantime, higher earners should take maximum advantage of the available tax relief.

Get in touch

If you would like to discuss this further, please do not hesitate to get in touch with myself, a member of the Wealth team or your usual Johnston Carmichael adviser.