The options for overhauling pensions tax relief outlined in the government’s call for evidence earlier this week may still be too complex to be workable, according to pension experts.
The 40-page government document outlined the differences in outcomes for some low earners under the current relief system and collated issues raised by stakeholders, and suggestions for changes to the tax relief administration.
The Treasury is calling for responses from the industry by 13 October, admitting it has never provided a “straightforward and proportionate” solution to tax relief problems.
Hymans Robertson head of DC provider relations Mike Ambery said any solution would need to be put in the context of the overall £40bn tax relief bill.
“It’s a fiendishly complex issue to address and the government needs to take care that it doesn’t adversely impact the wider tax-relief processes,” he said. “The four solutions outlined by the government in this consultation seem too complicated and the idea of moving all DC schemes to RAS feels like an extreme fix for the scale of the problem.”
Ambery continued: “We know that there will not be a ‘perfect’ solution to addressing this issue, but more must be done. What’s really needed is a full and fundamental review of the whole tax-relief system, similar to what was abandoned by George Osborne in 2016.”
Low earners – mainly women – are a particular area of risk. Aegon head of pensions Kate Smith said: “[They] are saving in pension schemes which use net pay schemes to administer pension tax relief are not receiving the 20% tax relief on their pension contributions to which they are entitled. Had they been saving in a scheme which used relief at source to administer pension tax relief they would have received this government top-up and had more in their take-home pay.
Smith said the issue was a “growing problem” as more non-taxpayers are being auto-enrolled into a workplace pensions scheme – but warned the solution to the issue needed to be simple.
“Although the consultation has been a long-time coming any solutions needs to be simple for savers to understand and easy and inexpensive for employers, providers and the government to administer. It may take a while to square this circle.”
Pensions and Lifetime Savings Association head of defined contribution (DC) Lizzy Holliday said the body would continue to advocate the so-called ‘P800 solution’, which uses real-time data provided by employers to HM Revenue and Customs (HMRC) in order to calculate whether an employee has paid the right amount of tax.
“We will continue to engage with the government regarding the barriers they have posed – action is needed on this matter,” she said.
“The call for evidence shows long-overdue progress towards fixing the tax anomaly that is leaving 1.75 million of the lowest paid pension savers in net pay arrangements worse off. On the minimum auto-enrolment contributions, those affected are losing up to a total of £63 a year each, and in many schemes it can be at least double this figure.”
With the high cost of pensions tax relief in 2018/19 the subject of criticism against the government, MHA MacIntyre Hudson partner Nigel May criticised using the promise of reforms as ‘a political football’.
“Unfortunately, when it comes to pensions tax relief, fools rush in where angels fear to tread and using the relief as a political football doesn’t help anyone,” he said. “Pension planning requires taxpayers to make long-term decisions, so frequent reforms and revisions are harmful. The inquiry may well lead to detailed recommendations and then reforms, but we’ve seen this before.”
This follows a report published by the Public Accounts Committee (PAC) on Monday (20 July) which called on the government to conclude whether the £38bn estimated cost of pensions tax relief in 2018/19 was even effective.
May continued: “The PAC report on pensions tax relief laid bare one of the inherent problems with the UK tax system. Since 2015 HMRC hasn’t evaluated any of the ten largest tax reliefs to assess how they support the government’s economic and social objectives. Pensions tax relief came in for criticism due to its high cost for a policy where effectiveness is poorly monitored and understood.
“Overall, while the cost of pension tax relief is large, there is much to be said for leaving well alone.”