Pensions: Tax relief costs skyrocket ahead of Rishi Sunak’s Budget | Personal Finance | Finance

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Mr Sunak had already introduced drastic fiscal policy over the past year with the freeze on income tax, capital gains tax and inheritance tax allowances until 2026 being confirmed in March. Furthermore, the Chancellor has also announced a 1.25 percent on National Insurance payments for both workers and employers to pay for the Government’s social care plans. Statistics from HMRC have revealed that the gross cost of pension tax relief hit £41.3 billion in the 2019/20 tax year, suggesting reform of relief could be the next on the chopping block.

This represents a rise from £38.2 billion the previous year, with the tax paid on pension incomes jumping from £18.7 billion to £19.2 billion over the same period.

Once someone earns tax relief on your pension, a portion of that money that has already been paid in tax on their earnings goes into your pension pot rather than to the Government.

Pension tax relief is paid on someone’s pension contributions at the highest rate of income tax they pay.

For example, those who are higher-rate taxpayers can claim 40 percent pension tax relief.

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Once overall tax on pension incomes is factored into HMRC’s figures, the net cost of pension tax relief for the last year came to £22.1 billion.

This is around £2.6 billion higher than the previous figure for the 2018/19 tax year.

Last year, an estimated £31 billion was contributed to personal pensions in 2019/20, a sharp increase from £27.9 billion the year before.

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Automatic enrolment into pension schemes has been identified as the primary cause of this increase.

According to HMRC, continuously rising minimum contributions raised the average per member contribution from £3,000 in the 2018/19 tax year to £3,300 in the following year.

Tom Selby, head of retirement policy at AJ Bell, outlined how automatic enrolment has been the primary culprit by the dramatic increase in costs.

Mr Selby said: “While a previous Chancellor once described the cost of pension tax relief as ‘eye-watering’, the main driver of this has been the success of automatic enrolment.

“Millions of people have been brought into pension saving as a result of the reforms, many for the first time.

“The fact the cost of pension tax relief is edging up simply reflects the success of auto-enrolment and represents an investment in the future for millions of people.

“This is good news for those individuals and, over the long-term, should be good news for the Treasury too as it will reduce the likelihood of people falling back on the state in old age.

“While rumours of radical pension tax relief reform are always likely to swirl – particularly ahead of a Budget when the public finances are severely strained – it acts as a vital incentive to encourage people to plan for the future and automatically bolsters the value of millions of retirement pots.

“Historically pensions have all-too-often been seen as a honeypot for Chancellors looking to boost their short-term balance sheet.

“But the reality is that too many people are still saving too little to fund a decent retirement and successive Governments have added damaging complexity and uncertainty to the system.

“Encouraging higher levels of saving and making the rules people have to navigate simpler must therefore be a priority for the Government.”

Mr Sunak is likely to introduce proposals for pension tax relief later this month as part of his autumn Budget announcement.





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