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Pensions tax relief set to cost government almost £40bn

Phillip Inman
Photograph: Kirsty O’Connor/PA

Pensions tax relief will cost the government almost £40bn this year, up more than £2bn on the previous year, illustrating the growing cost of subsidising retirement saving.

According to new statistics from HMRC, tax relief on employee pension saving is set to rise to £21.2bn while the tax giveaway on employer contributions to occupational pension schemes hit more than £18bn.

The increasing cost of providing pensions tax relief follows a surge in the number of employees paying into company retirement schemes. In the financial year 2017-18, 10.4 million individuals contributed to a registered pension scheme, up from 9.4 million in 2016-17.

But the average level of contributions fell, leaving the bulk of tax relief to be claimed by higher-rate taxpayers, who pay 60p from every £1 of pension contribution compared with standard-rate taxpayers who must pay 20p for every £1 of pensions saving.

Tax reliefs are offered by the government to influence individual and corporate behaviour. They give an effective rebate to those affected according to the marginal rate of tax they pay.

Adam Corlett, a senior economic analyst at the Resolution Foundation, said many tax reliefs should be reviewed to make sure they continue to be fair to all taxpayers.

“With the total cost of pension tax relief now almost 2% of GDP, this subsidy deserves more scrutiny than ever. Despite a series of complex reforms, the benefits are still heavily skewed towards wealthier households, while it is low earners who really need more help to save. Like many other expensive tax reliefs, there is a strong case for exploring whether other options might be both fairer and more effective.”

Angus Hanton, a co-founder of the Intergenerational Foundation, said pensions tax relief rewarded higher-rate taxpayers at the expense of those who are younger and on lower incomes.

“This is yet another example of intergenerational unfairness, as younger financially stretched generations simply don’t have the spare money to put into pensions when faced with sky-high student debt, housing and living costs,” he said.

HMRC said there were no figures for most of the tax reliefs it gives to individuals and companies because it was either uneconomic or intrusive to collect them.

According to a review by parliament’s public accounts committee, of the 424 tax reliefs provided, the tax authority does not report a cost for 239.

The parliamentary committee argued that these gaps in HMRC’s understanding of costs “means it cannot assess the value for money of many tax reliefs designed to deliver particular policy objectives”.

HMRC’s total forecast of the costs of tax reliefs for 2017-2018 is £416.8bn, which according to its annual report is related to 105 reliefs.