HM Revenue & Customs said on Thursday that from September 1 it would be “lowering the threshold” for requiring evidence in support of requests for pensions tax relief. Claims by telephone will also no longer be accepted and must be made online or by post.

The Financial Times runs the story as its front page headline

The UK tax authority is tightening control over pension relief claims by higher earners to “protect taxpayers’ money”, as part of a wider push to collect more revenue.

This is specific to claims against tax relief fraud where people claim too much back from the revenue.

Under the current tax rules, individuals can pay up to £60,000 per year into their pension if they have an adjusted income of up to £260,000 per year, and receive income tax relief at their marginal rate.

For workplace “net pay” pension schemes, full tax relief is applied automatically. For personal pensions, the government automatically adds the basic rate 20 per cent tax relief, and higher and additional rate taxpayers then claim the extra tax relief via their self-assessment tax return.

HMRC said it was lowering the threshold for requiring evidence on personal pension relief claims to “protect taxpayers’ money” after it conducted a review that revealed that

“many claims below the current evidence threshold were incorrect”

This looks like a meaningful attack on pensions being used not as  a tax-avoidance investment but a tax-evasion scam on other tax-payers. I assume that this has been costed by the HMRC and is considered a worthwhile investment of its staff’s time.

The Labour government said last year that it would invest an extra £555mn annually in additional HMRC resources to achieve £5bn more in yearly revenue by the end of this parliament.  This , a year on , is the fruit of that investment.

It seems that the biggest area of potential fraud is with personal pensions where only basic relief is credited to accounts automatically and personal contributions can claim higher rated relief at either 20% or even 25% of the contribution.

Salary sacrifice the problem?

HMRC said it was lowering the threshold for requiring evidence on personal pension relief claims to “protect taxpayers’ money” after it conducted a review that revealed that “many claims below the current evidence threshold were incorrect”. About 80,000 personal pension relief claims are received annually. When HMRC examined personal pension relief claims under £10,000, one-third of respondents needed to correct the amount claimed.

In my experience , many claims are made on money that isn’t contributed personally but sacrificed by savers so that company pensions are increased. This has advantages to both saver and company in terms of national insurance, the trouble happens when claims are made on personal contributions that were not made.

This relates to both “relief at source” payments and “net pay” but the incidence of claims on a net-pay scheme would be unlikely, there is no opportunity for the higher rate tax payer to claim higher rate tax relief if in a tax-payer.This looks like a problem with relief at source schemes.

All group personal pensions operating as “workplace” are relief at source. Some master trusts do. These include Nest, Some providers such as Peoples and L&G master trusts can operate as either relief at source or net pay, many master trusts and most own scheme occupational schemes operate net pay.

Avoidance or evasion?

There is another area of saving and this is into self-invested personal pensions which is highly popular in the advice driven wealth management portion of the market. Here personal pensions are used as tax avoidance mechanisms, until recently they could be used as an inheritance tax saving means of passing money through probate to those be quested wealth.

This story is breaking in the FT and no doubt will cause a big stir in wealth management and senior management circles where tax and national insurance avoidance are most important. If avoidance is proved to be evasion, then we are likely to see pensions moving faster away from pots towards providing a retirement income for life. This is in line with the roadmap of reforms laid out by DWP and Treasury in the Pension Schemes Bill.