HMRC ‘doesn’t understand’ impact of pensions tax relief, say MPs

Professional Pensions reports...

Night view of Big Ben and Westminster Bridge in London

HM Revenue & Customs (HMRC) must evaluate the benefits that are provided by pensions tax relief, MPs have said amid concerns the tax office does not understand the impacts.

In a report published on 20 July, the Public Accounts Committee (PAC) said the government could not conclude whether the £38bn estimated immediate cost of pensions tax relief in 2018/19 was effective.

It said that the government “has not made any assessment of whether that huge cost actually encourages saving for retirement or reduces dependence on state retirement benefits, or whether it just enables those already saving comfortably to save more”.

The committee also criticised HMRC and HM Treasury for being “insufficiently curious” about how tax reliefs can impact members of different groups in differing ways.

The report said: “The data HMRC publishes on who receives pensions reliefs is limited and we are concerned that some groups are not benefiting from tax relief on their pension when they should.”

It raised the issue of net-pay schemes, where savers earning below the personal tax-free allowance will not receive the tax relief they would receive if they had been in a relief-at-source schemes.

PAC chairwoman and Labour MP Meg Hillier said: “Every Budget we get tax breaks announced like baubles hung on a tree and they generate great headlines but the truth is the government has little clue about the value of an enormous cost to the public purse.

“It sometimes fails to predict with any accuracy what tax breaks will cost, and there is often too little interest in whether it delivers what it intended to.

“Tax breaks are not freebies – they cost the public purse hundreds of billions of pounds in lost income. The government must know who they benefit and to what end. It’s all still taxpayer’s money and [the] government must account for it.”

The committee recommended that HMRC should, within three months, establish and publish criteria for the evaluation of some tax reliefs, and within 12 months have completed the evaluation. It should then report back to the committee on progress within three months and 12 months respectively.

It also called on HMRC to publish data showing who is benefiting from pensions tax relief, split by income; groups with protected characteristics under the Equality Act; private and public sector workers; and defined contribution and defined benefit savers.

In response, a government spokesperson said all tax reliefs were kept under review to “ensure they strike the right balance between making tax administration as straightforward as possible with being effectively targeted”.

They added: “HMRC will provide information and extensive evaluation of the cost of tax reliefs to ensure they continue to work effectively. HMRC and HM Treasury are constantly working to improve the transparency of reliefs and the National Audit Office has recognised the improvements in increasing oversight.

“HMRC has further committed to expanding the coverage of the cost estimates we publish to provide more information on the cost of reliefs while strengthening the approach to evaluations.”

‘Politically easy money grab’

Some backed the PAC’s call for a review of tax relief, with Quilter retirement expert Ian Browne particularly calling out the “archaic flaw” that neglects to give net-pay members any tax relief.

He said: “Pensions are liable for income tax, but this is applied on the way out, not on the way in. This tax deferral system creates an incentive to save for the future and ensures people are contributing some income tax later in life, helping to smooth fluctuations of demography and the pressures of an ageing society.

“But we know that there are many who currently do not benefit from the relief, including low-paid workers. There are hundreds of thousands of workers who are auto enrolled that will not be getting tax relief on their contributions because they are in net pay pension schemes. This absurd archaic flaw in the government’s system has sat on the economic secretary to the Treasury’s desk for too long. John Glen keeps promising a review but while we wait, low-paid workers are missing out.

“A proper evaluation of how these groups can benefit from the relief, and adequately save for retirement is welcome.”

But while Society of Pension Professionals president James Riley said it was “right and proper to fully review the system”, he also said it was important to recognise that the £38bn headline figure was “more nuanced” and a review should be “thorough and open-minded.”

“Significant amounts of pension tax relief relate to deficit contributions made by employers to make good past underpayments,” he said. “Given the problems of the recent past with BHS, Carillion and Tata, and the subsequent focus on improving the security of pensions schemes, it seems inconceivable that the government would want to disincentivise employer contributions to pension schemes.

“Also for many members, upfront tax-relief is simply a deferral of tax which they will pay when they come to draw their pensions. It would be wrong for pensions to become less tax efficient than other savings! The scandal around auto-enrolling low earners into net-pay arrangements should be and can be remedied quickly. It is not in itself a reason to review the entire pensions tax relief.

“The risk with such a review is that it becomes a politically easy money grab which detrimentally affects the pensions savings of millions. Pensions savers will be paying for the pandemic for years to come out of their taxes. Care needs to be taken not to exacerbate the issue of inadequate saving for retirement which will ultimately create further pressure on the nation’s finances.”