Pension Tax Relief – Is It Too Good to be True? – TaxBack

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Pension Tax Relief – Is It Too Good to be True?

HMRC (Her Majesty’s Revenue and Customs) published their latest pension tax relief figures (personal and occupational pensions), at the end of February.

Accordingly, tax relief cost the Treasury £41.4 billion in 2016/17 from £40.9 billion in 2015/16. The slight increase from the previous year could be due to a higher rate of auto enrolment contributions which are expected to increase further in future. This leads us to question whether the UK government would continue to provide such relief to its taxpayers.

Pension Scheme Tax Relief explained

The UK tax structure enables individuals making their personal pension contributions to obtain tax relief in two ways. The HMRC provides basic rate relief while also contributing an additional 25 percent of what the individual contributed to the scheme. When there is an increase to an individual’s basic and higher rate band, 40p and 45p tax relief can be obtained.

With regard to occupational pension contributions for employees, PAYE income tax is deducted from gross salary after deducting the pension contribution. However, Class 1 Primary National Insurance would still be due on the gross salary.

The UK tax structure currently enables an individual to make a maximum pension contribution of £40,000 per year and obtain tax relief (pension annual allowance – PAA). The system provides provisions to utilise unused annual allowance from the previous three tax years. To obtain tax relief, an individual’s pension contribution should be less than his/her ‘relevant earnings’ (calculated as the higher of £3,600, or the total of employment, self-employment and furnished holiday let income generated in the tax year).

Past cutbacks

There have been several past cutbacks in pension contribution benefits.

The PAA stood at over £200,000 per year for many years during the 1990s, but was reduced to £50,000 in 2011/12 before falling even further. In April 2016, the introduction of the tapered PAA affected individuals with adjusted net income of over £150,000 with many seeing their PAA reduced by £1 for every £2 if their adjusted income was over £150,000; the reduction being capped at £10,000.

As opposed to the recently released ONS (Office for National Statistics) figures, UK public finances are still tight. The rapidly ageing and growing population will require more funds for public services. The state pension age had been increased recently, indicating future increases. Means-tested state pensions have also been mentioned. If any of these are introduced, the UK government should continue to incentivise pension contributions. As reported by The Independent, “The current state pension age is 63 for women and 65 for men, with the former due to rise steadily until all workers retire at 65

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