Pension Tax Relief

Pension Tax Relief Explained

The government wants people to save into a pension, and it offers an incentive in the form of a ‘bonus’ when they do so. Pension tax relief means that money you would otherwise have paid as tax, is instead paid by the government, into your pension. The tax relief you receive is based on your earnings:

• If you pay the basic tax rate, you get 20% pension tax relief
• If you pay higher rate taxes you get 40% pension tax relief
• Top rate taxpayers receive 45% pension tax relief

Why Was a Pension Tax Relief Review Being Considered?

The Public Accounts Committee voiced their concern in July 2020, following reports from HMRC that pension tax relief was costing the Treasury £38 billion each year. The government would argue that it’s a powerful incentive to people to save for their retirement. There’s a growing concern, however, that there’s scant evidence that this is the case. Hence the call for a wide-scale review of the policy.

Has the Review Been Delayed, or Cancelled?

There’s no doubt that, as the impact of Covid-19 continues to bite, the government will be looking for ways the repay its debts. It would be foolhardy, therefore, to assume that ruling out the review for 12 months means that change is off the table:

“Another perhaps more likely interpretation is the government is simply ruling out a formal review of the impact of pension tax relief on savings behaviours, which doesn’t rule out changing pension tax relief rules.”

Steven Cameron, Pensions Director at Aegon 

Is a Cut in Pension Tax Relief on the Cards?

Of course, without a crystal ball there’s no way we can know for sure whether cuts to pension tax relief are likely. However, given the state of the economy, it’s worth considering the possibility that the Spring budget in 2021 will usher in a reduction to the more generous 40% rate. A standardisation of the rate to 20% is not unlikely, given that the government needs to make savings where it can.

What Does This Mean For Harpur Wealth Clients?

What we know for sure is that the pension tax relief rules won’t change before the next budget – Spring 2021. If therefore, you’re eligible for the 40% rate, now would be an excellent time to contribute a lump sum, or catch up payment to your pension pot. To do so over the next few months will ensure that you receive the full government ‘bonus’ before the rules potentially change.