AJ Bell press comment – 12 January 2023
- The total cost of pension tax relief past £50 billion for the first time in 2021/22, new HMRC data shows (Non-structural tax relief statistics (January 2023) - GOV.UK (www.gov.uk))
- Income tax relief was estimated to have cost the Exchequer £26.9 billion in 2021/22, up £7.1 billion in the last five years
- National Insurance Contributions (NICs) relief, meanwhile, cost £24.7 billion in 2021/22, £8 billion more than in 2017/18
- Automatic enrolment and wage growth key drivers of rising tax relief cost
- Retirement savings incentives will once again come into sharp focus in the March Budget
Tom Selby, head of retirement policy at AJ Bell, comments:
“The cost of incentivising people to save for retirement is, on the face of it, eye-watering, with the ‘net’ annual bill – taking into account tax raked in from pension withdrawals – estimated to have surged past £50 billion in 2021/22.
“This cost is split fairly evenly between the upfront income tax relief savers receive on their personal contributions and the NICs relief that applies to both employee and employer contributions.
“Over the last five years alone, the cost of pension tax relief has swelled by around £15 billion. It’s important to remember this isn’t money down the drain, however – it simply reflects a combination of the success of automatic enrolment in boosting savings levels in the UK and increased wages over that period.
“What’s more, every pound saved in a pension should help reduce the risk of that individual falling back on the state in their later years.”
The challenge of an ageing population
“At some point, the Government will need to consider how to boost average pension contribution levels – although the pressure being placed on people’s incomes by spiralling inflation means that is unlikely to be a priority in the short-term.
“As we edge closer to the March Budget and with the Chancellor looking for cost savings, these latest figures will inevitably be seized upon by some as evidence pension tax relief should be fundamentally reformed.
“Discussions about the future of pension tax relief need to be focused squarely on ensuring more people are encouraged to save a decent amount for their financial future. Raiding pensions for short-term gain without considering the potential long-term consequences – something we have seen far too much of in the last decade – would risk undoing the early positive impact of auto-enrolment.
“Given the financial challenges facing millions of people already, saving for retirement likely already feels like a stretch for many. Any shift in the rules which undermines incentives to save for the long-term would risk being the straw that breaks the camel’s back.”
Source: HMRC
