Tax relief on pensions costs more than £36 billion pounds a year according to TUC analysis of Treasury figures. This is heavily skewed towards the well-off – not simply because they pay more into a pension but because the relief is at the top rate of tax. Treasury figures reveal that 60 per cent of tax relief, close to £22 billion, goes to higher rate taxpayers, including 25 per cent – nearly £10 billion a year – to the top one per cent of earners, on more than £150,000 a year.
How does tax relief work? If you put a pound into a pension, HMRC considers your income to be a pound lower. You are therefore assessed for income tax on one pound less than you actually earn. If you pay the basic rate of tax (22 per cent) it therefore costs you 78p to put a pound in your pension. But if you are a higher rate tax payer it costs just 60p to put a pound in your pension, because higher rate tax is 40 per cent. That’s why it is legitimate to talk about spending money on tax relief. Other tax payers are effectively contributing that 40p.
Pensions are a uniquely privileged kind of savings in their tax treatment. If you put money in a bank savings account, you do not get any relief and still pay tax on the interest. There is tax relief on savings in ISAs but only to a top limit of £10,900 a year from next year. Currently there is no limit on the tax relief on pensions savings made in a year.
The rationale for providing tax relief is that it is in the state’s interest for people to build up a pension so that there is less pensioner poverty and people do not require means-tested benefits. But the unique tax treatment of pensions savings means that they are a very attractive form of tax avoidance for very well-off people, such as top directors.
The TUC’s annual PensionsWatch survey last week analysed the pension arrangements of 373 directors from 103 of the UK’s top companies. It showed that top directors have amassed pension pots worth an average of £3.4 million, providing an average annual pension of £247,785 a year. The highest paid directors in each company have pension pots that would provide an average annual pension of £333,664, and a small number of directors can look forward to an annual pension of over a £1 million a year. It is rare for top directors to be in the same pension scheme as their staff.
The Chancellor in his last budget announced plans to limit tax relief on pensions for those who earned more than £150,000 a year. While the TUC has not suggested the abolition of tax relief, it has called for a wider debate on tax fairness. The TUC’s Touchstone pamphlet “The Missing Billions” suggested minimum tax rates to deal with tax avoidance. Rather than reforming individual reliefs, it suggested that those earning more than £100,000 a year would face a limit on the amount of tax relief they could claim by imposing a minimum tax rate of perhaps 32 per cent. This would mean that however they arranged their tax affairs they would pay at least 32 per cent of their income, with higher minimum rates for even bigger incomes.
6 Responses to “Top earners cost taxpayers £22bn in pension tax relief”
Pete Bowers
RT @HouseOfTwits: RT @leftfootfwd Top earners cost taxpayers £22bn in pension tax relief http://bit.ly/pDCb5
Marcus Cotswell
But … hang on a minute … these ‘top earners’ (myself included – I earn the princely sum of £45k a year and am therefore presumably categorised as an enemy of the people) do then pay tax on the income they get in retirement. Pensions tax relief is tax deferred, not tax withheld. Do you want to go away and do the maths again, taking this into account? Or is the commitment of this so-called ‘evidence-based’ blog actually just lip service?
Matthew Taylor
It also makes no sense to talk of other people “…effectively contributing that 40p.”, still less to say it “…costs just 60p to put a pound in your pension.”
These statements only become true if you accept two predicates: 1) All earned income is the property of the state; and 2) Any money not taken by the state as tax is given by the state to the individual.
Aside from full blown Communists – not exactly “progressives” – I don’t know of many people who would accept either premise.
Web links for 14th September 2009 | ToUChstone blog: A public policy blog from the TUC
[…] Top earners cost taxpayers £22bn in pension tax relief Nigel has a guest post up on Left Foot Forward about how tax relief on pensions works, and the case for introducing minimum tax rates. Related posts (automatically generated):Pensions tax reliefWill the hit on pensions tax relief affect savings?A £200,000 pension the norm for senior directors […]
Hamish
Interesting that you should misquote the basic rate of income tax.
You seem to want to forget the Budget in which the basic rate was lowered to 20%, perhaps because it also abolished the 10% rate.