Actuaries call for simplified pensions tax system

ACA was responding to a call for evidence by the Office of Tax Simplification on its third-party data reporting review. 

Commenting on proposed methods of delivering a full tax relief on member contributions, ACA noted that for schemes where tax relief is given via relief at source rather than via net pay arrangements, many members are missing out on relief to which they are entitled because the process requires them to claim part of it from HM Revenue & Customs via their tax returns.

ACA taxation committee chair Karen Goldschmidt estimated that as much as £750m is missed “due to ignorance or inertia”. 

ACA’s response suggested a system where pension schemes provide contribution information to HMRC. One consequence “could be such that higher-rate taxpayers can receive their rightful pensions tax relief automatically, and possibly earlier than under the present system”.

“We would fully support this outcome,” its response stated. 

Though the ACA noted that this “would require an extra information exchange from the provider to HMRC compared with the present situation, under which (after the member has paid contributions net of basic rate tax) the scheme reclaims that basic rate tax from HMRC either at the year end” or for example monthly via an interim claim.

“In order for HMRC to tie up member contributions with individuals, the scheme would (for example, on a monthly basis) need to provide HMRC with a schedule of [national insurance] numbers and (net) contributions,” it explained.

“After submitting the claim form, the scheme would still receive the basic rate tax from HMRC for allocation to each member’s fund as at present.

“Whether or not an additional tax relief payment would be owed to the member would depend on their total income (net of any deductions) during the year, so this might not be evident until the end of the tax year, although the amounts could be used to adjust the member’s tax code on an interim basis with full adjustment at the year end.”

ACA did not welcome every proposal to hand more data to HMRC, however. 

Asked for comment on any approaches for HMRC to monitor pension input from employees and employers against the annual allowance, and identifying when these tax charges are due, the industry body warned that providing extra data reporting to HMRC in this area “could be disproportionate, and would not have any practical outcome in many situations”.

“For example, [a] requirement for pension scheme administrators to calculate accurate annual allowance usage values for all members [would be] extremely disproportionate,” its response stated. 

“It would be very onerous, and inappropriate, given that the number of members who incur an annual allowance charge is very small compared with the total number of pension savers.”

In general, ACA welcomed initiatives to simplify the tax system, but Goldschmidt emphasised they would need to be “realistic, manageable and proportionate and not result in inappropriate administrative burdens for employers and pension scheme providers”. 

“Changes to try to enable HMRC to take over automatic management of the infamously complicated annual allowance are unlikely to be practical or worth the information burden that would be involved, especially for defined benefit savings,” she continued.  

“Any OTS proposals need to recognise that the government may well overhaul the pensions tax regime soon, and any regime change from the government needs to learn from the annual allowance challenges and be deliverable without creating huge administration burdens.”