Pension tax relief is a subject that rarely seems to leave the front page. Instead, the advice profession and the media constantly analyse and debate its future. So it’s no surprise the recent announcement by HM Revenue & Customs on the cost of pension tax relief has caught everyone’s attention.
The headline is the cost has remained constant - £38.5bn in 2015/16, nudging up to £38.6bn in 2016/17. But hang on, haven’t we just gone through a period of automatic enrolment, thus creating millions more pensions savers? The Pensions Regulator has said the number of automatically enrolled employees increased from 5.2 million by 2015, to 6.1 million by 2016, to 7.7 million by 2017.
So, everything else being equal, surely tax relief costs should have gone up?
Tax relief given on employer contributions to personal pensions has increased, as we would have expected. It rose by a sizeable 19 per cent from £4.3bn to £5.1bn, probably on the back of auto-enrolment.
However, tax relief on employee contributions to personal pensions flat-lined. This probably indicates the changes to the tax relief gears – the introduction of the money purchase annual allowance and the tapered annual allowance, and lowering the lifetime allowance to £1m in April 2016 – are starting to bite down. Employees could be beginning to reduce what they pay.
The cost of tax relief on employer contributions to occupational pension schemes remained the same. In fact, it dipped ever so slightly. Given that a sizeable chunk of new employer contributions would have been paid to Nest, an occupational pension scheme, that strikes me as a little bizarre. However, we need to dig a bit deeper to get the full story.
The main bulk of employer pensions tax relief is paid not on contributions to active members of schemes, but to plug pension deficits. The Pensions and Lifetime Savings Association suggested last year that two-thirds of the £18bn paid goes towards defined benefit schemes’ recovery plans. Even if the cost of tax relief for new employer contributions went up, it could be that tax relief given on employer contributions to plug the debt has reduced.
One other explanation for the steady headline cost of tax relief is that although auto-enrolment has created more savers, overall contribution rates have fallen.
One sad note is the cost of tax relief on contributions paid by the self-employed remained at £700m, but that’s only just over half of the bill for 2009/10, showing how some self-employed are cutting back on building up their pension plans.
One thing is for sure, it’s too simple a solution to take the tax relief cost announcement at face value. We need to unpick the figures to get a clearer idea of the direction of pension contributions in the UK.