Pensions Tax Relief: fools rush in where angels fear to tread
Following the Public Accounts Committee’s (PAC) criticism of pensions tax relief in a report published on Monday, 20 July and the launch of a Treasury Select Committee inquiry into the UK tax system,Tax Partner, Nigel May says however imperfect the current system, there’s a strong case to leave well alone, especially for pensions.
“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; £38bn in 2018-2019 for a policy where effectiveness is poorly monitored and understood.
“Unfortunately, when it comes to pensions tax relief, fools rush in where angels fear to tread. Using the relief as a political football doesn’t help anyone. Pension planning requires tax payers 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.
“Pension legislation was already the subject of a major overhaul with effect from April 2006. Since then pensions have been subject to tinkering on an almost annual basis. In April 2016 tapering of the annual pension allowance for the UK’s public sector defined benefit scheme was introduced, and illustrates very effectively how seemingly worthy changes have unforeseen and negative effects. The consequence was that NHS consultants were disincentivised from working because of the resulting pension tax charges. This was only dealt with this April, by increasing the point at which the annual allowance is tapered from £150,000 to £240,000.
“Overall, while the cost of pension tax relief is large, there is much to be said for leaving well alone.”
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