Looks at recent measures to restrict pension tax reliefJump to full report >>
The principle of the current system of tax relief is that contributions to pensions are exempt from tax when they are made, but taxed when they are paid out to the individual. Pension contributions made by individual employees are usually paid out of pre-salary, so tax relief is received at the individual’s marginal tax rate. The main limits that apply are the lifetime allowance (LTA) and annual allowance (AA).(Finance Act 2004, Pt 4) At introduction in 2006, the AA was set at £215,000 and the LTA at £1.5 million. Both were set to increase in stages, with the LTA reaching £1.8m and the AA £255,000 by 2010. (HM treasury, Budget 2004, para 5.45) Since 2010, both allowances have been reduced on a number of occasions.
The Government estimates that these reductions have significantly reduced the share of pension tax relief going to additional rate taxpayers and reduced the cost to the Exchequer by over £6bn a year (Cm 9102, Cm 9102, July 2015, para 1.5 and 2.6.)
Calls for more fundamental reform have continued, partly fuelled by concerns that the current system is not effective in encouraging saving particularly among those most at risk of not saving enough for their retirement. The Government launched a consultation on reforming pension tax relief to strengthen the incentive to save in July 2015. However, in Budget 2016, it did not announce changes to the tax treatment of pensions, on the grounds that it was clear that there was 'no consensus' (HC Deb 16 March 2016 c966). For more detail, see Library Briefing Paper CBP-07505 – Reforming pension tax relief.