Government urged to review pension tax relief

The Government has come under further pressure to overhaul pension tax reliefs after the Parliament’s financial watchdog found that it did not understand whether the expensive scheme was actually effective.

Pension tax reliefs, which are Government’s top-ups to the pension pots of millions of people, are estimated to have cost the Treasury a mammoth £38billion a year in 2018-19. While expensive, its rationale has been that it provides an incentive to save long-term.  

But the Public Accounts Committee, which scrutinises the value for money for public spending, said the Government did not actually understand the impact of pension tax breaks, including pension reliefs, and called for a wide-scale review of the policy. 

It said: ‘The Government has not made any assessment of whether that huge cost actually encourages saving for retirement or reduces dependence on state retirement benefits, or whether it just enables those already saving comfortably to save more.’ 

The report is likely to add to ongoing speculation that Government will eventually cut pension tax breaks for higher earners, and take the opportunity to introduce a flat rate of relief which may be more intuitive. 

The PAC also said it was concerned that low-paid and part-time workers were not benefiting from pension relief – an issue which This is Money has been highlighting since 2018.

‘Around 1.75 million low-paid and part-time workers earning less than the personal allowance of whom around three quarters are women, will not be getting tax relief on their pension contributions after being auto-enrolled into employer pensions,’ the report said.

In their manifesto, the Conservatives promised a ‘comprehensive review’ of this loophole which sees workers, mostly women, earning between £10,000 and £12,500 lose pension top-ups automatically paid to the better off. 

Then at this year’s Budget, they promised they would launch a consultation by spring, but this was again delayed due to the impact of coronavirus. 

We have repeatedly highlighted the scandal since spring 2018, and pointed out the unfairness of penalising the worst off workers, while the rich get their full whack of pension cash.

Kate Smith, head of pensions at Aegon said: ‘Many of the UK’s lowest earners, mainly women, don’t earn enough to pay income tax and are in net pay pension schemes which don’t benefit from pension tax relief. 

‘This is a growing problem and one that has still not been addressed by the government.’      

Victoria Todd, head of Low Income Tax Reform Group (LITRG), said: ‘We welcome the Public Accounts Committee drawing attention to the issue of low-income workers missing out on tax relief on their pension contributions. This is an issue we have been drawing attention to for some time.

‘Its recommendation of publishing more data is helpful in terms of making the issue more transparent so that policymakers can understand the impact, which – according to the existing data – shows that many more women are affected than men.

‘However, we would like to see government taking action to address the issue.’

A Government spokesman said: ‘HMRC and HMT are constantly working to improve the transparency of reliefs and the National Audit Office has recognised the improvements in increasing oversight.

‘HMRC has further committed to expanding the coverage of the cost estimates we publish to provide more information on the cost of reliefs while strengthening the approach to evaluations.’