The launch of the consultation on ‘strengthening the incentive to save’ last summer started a period of intense debate in the UK around the level and distribution of tax relief arising from pension saving. The relief enjoyed by ‘higher earners’, bearing the lack of consistent definition of this term in mind, has generated much discussion. However, has the discourse missed the factor(s) of greatest consequence?
HMRC’s (Table PEN6) data shows that over 50% of the tax relief provided has consistently accrued to employers rather than individuals. Hymans Robertson, the consultancy, calculates that FTSE 350 companies alone have contributed at least £40bn per annum during the current decade to their Defined Benefit (“DB”) schemes. This level of contributions is likely to lead to at least £8bn per annum of tax relief. The aggregate level of relief received by employers is expected to be materially higher once other UK companies and local subsidiaries of foreign companies are included, broadly supporting this set of HMRC’s figures. Some of the employers’ relief might well be directly allocable to individuals but there is no data in the public domain, that I am aware of, that would facilitate such calculations.
Excluding the tax relief captured by companies leaves less than half of the aggregate gross pensions-related relief up for discussion. Offsetting the tax received on pensions in payment brings the net relief figure, after stripping out the employer-related amounts, to less than £2bn per annum. The reliance on, and debate related to, these PEN6-based figures is subject to HMRC’s caveat that “costs are subject to large revisions and have a particularly wide margin of error”.
A further complication in identifying which (groups of) individuals benefit from the tax relief being provided is that HMRC does not record whether a pension scheme is DB or Defined Contribution (“DC”) in nature. This distinction is the first step required in the process of allocating the relief to those who benefit from it. The next step would be to calculate the extent of the relief received for each saver (or group thereof). If it is not possible to take these key initial steps, how then is the rest of the calculation journey completed?
Some of the claims of the distribution of tax relief are based on the written response by the Financial Secretary (HM Treasury) to a Parliamentary Question. This response sets out that over 55% of income tax relief has accrued to those earning at least £45,000 per annum in recent years. I queried the calculations with HM Treasury under a Freedom of Information request. This request was ultimately met with the response that “officials have stated they do not usually release the calculations or methodology to the public”. Such opacity does not engender much confidence, on my part at least, in the figures published.
There have been other attempts by organisations outside of Government to calculate the distribution of tax relief. One widely quoted attempt relies on data (Table 3.8) from HMRC up to the 2012/13 tax year. Automatic Enrolment (“AE”) only started in October 2012, so this data includes very little impact from AE. AE has led to an increased proportion of relief being enjoyed by lower earners, including those whose incomes are below the Personal Allowance but who receive ‘Relief At Source’. This 2012/13 data includes the Lifetime Allowance at £1.5m and the Annual Allowance at £50,000 – both of which have subsequently been cut, potentially resulting in a relative reduction in pension saving (and related relief) by Higher Rate and Additional Rate tax payers. Each of these factors understates the proportion of relief that Exempt and Basic Rate tax payers enjoy. In addition, HMRC again caveats the data warning that “occupational and personal pension contributions are imputed onto the sample records for many individuals within the SPI in order to get a full estimate of total income for all cases. Consequently, distributions by total income range should be viewed as indicative”.
The Department for Work & Pensions (“DWP”) recently estimated that over two-thirds of workers who meet the age criteria for AE will pay no more than Basic Rate tax. The DWP anticipates the cost of additional tax relief on savers’ contributions at £2.2bn per annum by 2019/20. Employers are predicted to be paying an additional £6bn per annum of contributions in respect of these savers, leading to anticipated tax relief of around £1.2bn per annum, excluding the impact on National Insurance receipts. Is this additional £3-4bn per annum of pensions-related tax relief, a sizable proportion which will accrue to those paying no more than Basic Rate tax, really the driver for the Chancellor of the Exchequer reviewing the incentives promoting pension saving?
The debate around UK pension tax relief has, thankfully, no more than another fortnight to run – in this round at least. The focus of discussion to date has, on reflection, potentially not given as much attention as is warranted to the fact that the majority of tax relief is enjoyed by employers. Much of this relief relates to DB schemes. Pension provision in years to come will predominantly be DC in nature although contributions to DB arrangements will persist for some time yet, not least to address existing deficits. The Government can help drive the focus and effectiveness of future such debates by more clearly setting out what its policy objectives are. Perhaps the Chancellor has not been affected by the noise arising from the debate to date and will indeed strengthen the incentive for future savers?