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Restricting pension tax relief

Published Tuesday, November 22, 2016

Looks at recent measures to restrict pension tax relief

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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.

  • In October 2010, the Government announced that the AA would reduce from £255,000 to £50,000 from 2011 and the LTA from £1.8m to £1.5m from 2012. This was legislated for in the Finance Act 2011 (s66-7 and Sch 17 and 18).
  • In the Autumn Statement 2012, the Government announced that from 2014-15, the LTA would reduce from £1.5 million to £1.25 million and further reduce the AA from £50,000 to £40,000. This was legislated for in the Finance Act 2013 (ch 4).
  • In the March 2015 Budget, the Government announced a reduction in the LTA from £1.25 million to £1 million from April 2016 (para 1.232). Provision for this is in the Finance Act 2016 (s19).
  • In the Summer 2015 Budget, the Government announced that it would introduce a taper to the Annual Allowance for those with adjusted incomes, including their own and employer’s pension contributions, over £150,000 from April 2016 (para 1.223). This was legislated for in the Finance (No. 2) Act 2015,

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). However, he did announced the introduction of the Lifetime ISA from April 2017. For more detail, see Library Briefing Paper CBP-07724 Lifetime ISA and pensions (November 2016) and CBP-07505 Reforming pension tax relief (February 2016).


Commons Briefing papers SN05901

Authors: Djuna Thurley; Roderick McInnes

Topics: Pensions, Taxation

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