HMRC counts the cost of tax reliefs
HMRC has published its annual assessment of the cost of tax reliefs.
Every January HMRC publishes a table of ‘Estimated costs of principal tax reliefs’. Clearly any Chancellor facing a budget deficit is bound to run his or her eyes down the list to see where the money is not coming in.
After that assessment, they may well contemplate whether some tweaking could benefit the Exchequer’s coffers without causing too much of a political uproar.
This year’s list has a familiar look to it in terms of the most expensive reliefs. At a cost of over £101 billion the largest factor by far is the Personal Allowance and the next two largest are equally untouchable for any Chancellor – national insurance contribution (NIC) thresholds and the Capital Gains Tax exemption for main residences.
The fifth largest is income tax relief for pension schemes, costing an estimated £24 billion in 2017/18.
This is a peculiar amount because of the way in which Whitehall calculates it. Their definition adds together income tax relief on employer and individual contributions and pension fund investments, thendeducts tax charged on pensions in payment. That deduction – which in effect relates to pension contributions made over many years – is estimated to be worth £13.4 billion for 2015/16.
Remove that deduction and the cost of pension income tax reliefs alone could be £38–£40 billion in this tax year which is the equivalent of nearly 9p on basic rate tax.
Further down the list, the tenth entry is NIC relief for employer pension contributions. This is forecast to cost £16.9 billion in 2017/18. The government is virtually assured both income tax and NIC costs will increase substantially because of legislation raising automatic enrolment pension contributions by about 150% in 2018/19 and another 60% in 2019/20.
Keith Bonner, Director and lead IFA at HSC Financial Services Ltd says “As the graph above shows, the cost of pension reliefs has been rising anyway, despite government measures to rein them back with allowance cuts and other measures and so if you – or your employer – are contemplating pension contributions, perhaps as part of year end planning, it is worth remembering the HMRC’s list, and that lure for any Chancellor to change pension relief.”
Please call us for year-end pension planning advice on 01273 710404 or email us by clicking here.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.