Relief at last: Govt 'backs down' on pension tax changes

The Times reported today (7 October) that chancellor Rachel Reeves had been advised by senior officials not to make changes to tax relief in her first Budget statement later this month.

Tax relief is seen by many as unfair as it provides high earners with tax relief at 40% or 45% when they pay in to a pension, while they may pay tax at a lower rate when they take a retirement income.

However, changing these tax relief thresholds could affect a large number of public sector workers such as teachers and nurses, according to the Times.

The report comes after Labour previously abandoned plans to reintroduce the lifetime allowance, which was scrapped by the previous government.

Speculation has been rising of a potential change to tax relief on pension contributions ever since Reeves revealed a £22bn “black hole” in the UK’s finances – a figure some, including previous chancellor Jeremy Hunt, have disputed.

A communication from the Pensions and Lifetime Savings Association (PLSA) last month inadvertently sparked more rumours after it stated that pensions minister Emma Reynolds would address “a change to pensions tax relief” during her speech at next week’s PLSA Annual Conference.

However, a spokesperson for the PLSA told Pensions Expert that the tax relief reference was due to a “drafting error”, and emphasised that there had been no communication from government on this area of policy.

The association later urged the government to tread carefully regarding potential tax relief changes, highlighting that the current system was an “important incentive” for people to save for retirement.

Challenges and downsides

Mike Ambery, retirement savings director at Standard Life, said: “Changes to income tax relief are a potentially significant revenue raiser but come with two major challenges.

“First, they would be highly complex to implement and second, they come with political downsides given their knock-on implications for public sector workers in particular.

“The chancellor will be assessing many ways of raising revenues and whether pensions will feature prominently in the Budget remains to be seen but there are other aspects of the system that would pose fewer logistical issues and come with fewer strings attached.”

Ambery added that, given the long-term nature of pensions, any changes should be considered within the government’s ongoing Pensions Review “so that the different aspects of pensions system could be viewed in the round”.

SPP questions impact of tax changes

The news also comes as the Society of Pension Professionals (SPP) has published a paper questioning whether such changes would raise as much money for the Treasury as some have speculated.

“On further inspection, such changes are unlikely to lead to the savings that some have suggested and may end up costing more in the long term,” the SPP stated.

“Changing pensions tax relief will be incredibly complex, time consuming and costly, leading to substantial disruption for savers, employers, the pensions industry and the UK economy.”

The true cost of pensions tax relief was smaller than headline figures often quoted, the SPP contended. In addition, moving to a single flat rate of tax relief would bring with it considerable challenges such as potential double taxation for some people, larger tax bills for public sector workers, and the risk of people reducing how much they are saving for retirement.

Steve Hitchiner, chair of the SPP’s tax group, said: “There are no easy solutions to the challenge of improving pensions tax relief arrangements, which as the SPP paper sets out, will bring with them substantial costs, complexity and disruption.

“However, there are alternative means to raise tax revenues and SPP hopes our analysis of the opportunities and challenges that some of these may bring helps to inform policymakers and wider debates around such issues.

“If the government does decide to make changes, it is essential that they are properly consulted on and implemented in a realistic timeframe – a point we have repeatedly made to ministers and again highlight in this paper.”