Whenever a Budget approaches we can be certain that part of the discussion will be about pension tax relief.
Discussion about this began ahead of last year’s aborted Budget, sparked by HM Revenue & Customs (HMRC) publication of its most recent data on the cost of pension tax and National Insurance contributions (NIC) tax relief.
This was then catalysed by the publication of a report from the Institute of Economic Affairs (IEA) in which it came up with its latest idea to scrap inheritance tax, funding it by scrapping the tax-free cash available from pensions.
For context, the IEA has form on making proposals to scrap inheritance tax, and this is just the latest.
While acknowledging that some reform is desperately required (pension tax taper, MPAA, lifetime allowance are all common bugbears), the challengers to the status quo have emerged once again ahead of the new Budget, confirmed for 11 March.
They are propelled by headlines such as “Pension tax relief to cost £2bn more than last year”, “saving subsidy costing nearly 2% of GDP” and the emotive “No justification for pension tax-free cash so let’s use it to get rid of inheritance tax instead”.
My observation is that this is a continuation of a toxic trend that’s developed over the past few years – the tactic of pitching one idea against another to create an emotive argument about ‘worthiness’ or ‘fairness’ rather than critical review.
It is the same tactic that pitched “Let’s tax bankers more to get more nurses” and many other funding or lobbying proposals.
It is divisive, forcing people to take an emotional view and drive them to support a particular side. The idea that pension tax-free cash should fund scrapping inheritance tax is, of course, nonsense. They have about as much to do with each other as the bankers and nurses, and instead, the argument about what the desired outcomes are should be the only subject of debate.
The subject of the cost of pension tax relief deserves more critical attention.
I’ll address the headline cost first, estimated to be £37.8bn in 2017/18, and in doing so begin with some context. Pension tax and NICs relief are far from the only tax reliefs available from the Exchequer.
HMRC provided a recent update to the Parliamentary Public Accounts Committee in which it confirmed that there are 424 forms of tax relief available. Of these, HMRC does not report a cost for 239. That’s perfectly understandable, I think.
It appears HMRC neglects to record the landfill tax relief available to pet cemeteries and the disposal of domestic pets, however, its annual report does say that the total cost of tax reliefs for 2017/18 is forecast to be £416.8bn.
Let that sink in for a second. If we’re looking at this objectively, the UK spends over £400bn every year in an attempt to encourage certain outcomes or behaviours with a tax (or lack of) incentive.
For me, that puts the cost of pension tax relief into perspective. Forget the “costs nearly 2% of GDP” and embrace “just 10% of our total tax relief encourages better retirement outcomes and greater independence from the state”.
That’s because it is all about driving a desired outcome, or at least, it should be.
Earlier I poked fun at the landfill tax relief available to pet cemeteries, but the educated reasoning would be that this is to encourage creation of pet cemeteries so that our great nation of pet lovers will dispose of our pets in a controlled and appropriate way.
Except that’s incorrect – it is in fact due to a quirk of environmental law that requires pet cemeteries to be licensed as landfill sites (there truly are no limits to where researching a pension article can take you).
Back to the cost of pension tax relief. Around half of the total annual cost is taken by employer contributions to occupational schemes. That shouldn’t be a surprise, as the population does most of its retirement saving through an employer-sponsored scheme of some kind.
What may come as a surprise is the amount of income tax generated by pensions in payment. This is forecast to be £18.3bn in 2017/18, based on HMRC’s administrative data on taxable pension payments.
And what’s more, there’s a revealing footnote to HMRC’s data, in very small print, that says: “Future tax receipts on pensions paid to individuals currently making contributions to funds may be higher than those currently receiving pensions because of earnings growth and an increase in the average number of working years of membership in pension schemes.
“Also, the ratio of pensioners to contributors may be expected to increase significantly which would tend to reduce the cost in net present value terms.”
That’s right – HMRC estimates that, due to demographics and increased amounts of saving now, the future net cost of pension tax relief is expected to be lower.
The headline “Cost of pension tax relief likely to fall as nation saves more” isn’t likely to be written before the coming Budget. But perhaps it should be.
Greg Kingston is head of group communications director at Curtis Banks