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.Like this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.