|>>|| No. 7184
Savers may face a fresh raid on pensions as the cost of tax relief passed £50 billion for the first time.
Figures published by HM Revenue & Customs show that the total cost to the Treasury of tax relief on pension contributions jumped by more than 10 per cent last year as a record number of people saved for their old age. The tax break is now so expensive that abolishing it would allow the government to wipe out the budget deficit at a stroke, or halve the basic rate of income tax to 10p in the pound.
The £5.3 billion increase in the cost last year adds to the pressure on public finances resulting from expensive spending commitments made at the Conservative Party conference and the deteriorating economic outlook.
A source close to the Treasury said: “The cost of tax relief is only headed in one direction at the moment. There is widespread recognition that the cost trend needs to be reversed.”
Tax relief lets higher-rate taxpayers put £1 into their pension for every 60p they contribute, but basic-rate payers have to contribute 80p. More than two thirds of the value of the break goes to people who earn more than £45,000 a year, leading to accusations that it subsidises the wealthy. Almost five million higher and top-rate taxpayers benefit, by an average of about £5,000 a year.
The figures, buried in an HMRC document published last week, show that the relief costs the Treasury almost 50 per cent more than it did ten years ago, and has more than doubled since 2000. The increase reflects the success of the government’s automatic enrolment programme, in which workers without pensions are signed up to company schemes. Last year an extra one million people started saving for their retirement through auto-enrolment.
However, many in the Treasury question whether such a generous tax break is sustainable, particularly as the bill is likely to jump higher again in six and then 18 months’ time, when the minimum contributions for auto-enrolment pensions increase.
George Osborne ditched the idea of radical reform last year when he was chancellor but senior figures in Mr Hammond’s Treasury are understood to view the system as costly, and unfair on people with lower incomes. There is also disquiet that at least 70 per cent of the cost goes to members of final-salary pension schemes, who are usually older workers who already have very comfortable pensions.
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