For every £100 of DC pension contributions £32 of income tax has been relieved

23 June 2020

The Pensions Policy Institute (PPI) have published a briefing note number 122 that considers the inequity of tax relief on Defined Contribution pension contributions.

Key findings of the PPI include

  • A flat rate of tax relief on DC pension contributions would increase the proportion of DC pension tax relief associated with basic rate taxpayers from 26% to 42%
  • A basic rate tax-payer, who works and contributes continuously to a pension could get around one fifth more from their savings under the current tax advantaged system than under a non-advantageous structure. A higher rate tax-payer could receive around half as much again from their savings
  • For every £100 of DC pension contributions made from gross earnings or by an employer, £32 of income tax has been relieved
  • The total value of contributions to DC pensions schemes was £29bn in 2018 from individuals and employers. Around £9.3bn of income tax was relieved in respect of these contributions
  • Since the implementation of automatic enrolment the proportion of pension tax relief going to those earning less than £30,000 has only increased from 23% to 24% despite the proportion of claimants increasing from 52% to 63%
  • 71% of tax relief on DC pension contributions goes to men, who make 69% of the contributions.

But PPI warns that introducing different tax relief regimes would require careful consideration as it could result in unintended consequences.

Full details of the Briefing note  are available at the Pensions Policy Institute.

 CIPP comment

At Budget 2020, the Chancellor of the Exchequer announced that a Call for Evidence would be published to discuss the inequitable outcomes as a result of Relief at Source schemes (RAS) when compared with Net Pay Arrangements (NPA). We await the launch of the Call for Evidence.

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