Looks at the current debate on pension tax relief reformJump 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 (FA 2004), Part 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. (FA 2004 s218 and 228).
Since 2010, both allowances have been reduced on a number of occasions. The Government estimates that these reductions have “significantly reduced the share of pensions tax relief that goes to additional rate taxpayers” and reduced costs to the Exchequer by over £6 billion a year. (Cm 9102, Cm 9102, July 2015, para 1.5 and 2.6.) For more detail, see Library Briefing Paper SN-05901 Restricting pension tax relief (February 2016).
However, 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. It is expected to respond to this in Budget 2016.
Debate focused on three approaches to reform:
However, in Budget 2016, the Chancellor did not announce any fundamental change to the tax treatment of pension on the grounds that there was ‘no consensus’ (HC Deb 16 March 2016 c966).
Commons Briefing papers CBP-7505
Authors: Djuna Thurley; Richard Cracknell