Pension tax relief remains untouched but a string of technical anomalies are to be ironed out in this year’s package of ‘tax day’ consultations.
The Treasury has issued 30 consultations on technical changes, including updating pensions tax rules to make it easier for pension schemes to settle annual allowance charges from previous tax years, after an anomaly emerged in as a result of the McCloud court judgment.
A Treasury consultation published today says it identified the problem while finalising the remedy for the McCloud case, which found it is unlawful to treat existing public sectors differently based upon members’ age.
The government says it has identified several aspects of the pension tax framework that do not work as intended in all situations and need updating to deal properly with cases of this type. The Treasury says the current framework does not straightforwardly permit individuals to ask their pension scheme to settle annual allowance charges from previous tax years by reducing their future pension benefits (‘Scheme Pays’). The government will therefore make technical updates to pension tax rules to remove these anomalies.
The government has been consulting since 2018 on whether the taxation of trusts is transparent and fair. It has today concluded that there is not a great deal of demand for reform at the present.
But critics say the Treasury has failed to address the net pay pension tax relief anomaly that sees many low-income pension savers miss out on tax relief if their employer offers an occupational scheme rather than a contract-based scheme.
Aegon pensions director Steven Cameron says: “There’s much to be welcomed in the HM Treasury and HMRC package of ‘tax day’ consultations, even if it appears to have lived up to its billing as day mainly for the most technical of tax enthusiasts. Efforts to make tax digital, remove sources of error and clamp down on tax avoidance and evasion are all positive developments and should continue to reduce the ‘tax gap’ as we seek economic recovery. As part of this, it’s important that drives to ‘improve people’s experience of the tax system’ extend to making it easier to claim all tax relief entitlements.
“Within pensions, higher and additional rate taxpayers who are in ‘relief at source’ schemes have to separately reclaim relief above the basic rate, and there’s anecdotal evidence that many forget to do so. Even more concerning, there are growing numbers of low paid individuals in ‘net pay’ pension schemes who because they don’t pay income tax, don’t get the 20 per cent tax relief their peers in ‘relief at source’ schemes get by default. We urge the Treasury and HMRC to prioritise doing the right thing by those who are currently missing out on their pension tax relief entitlements.
AJ Bell senior analyst Tom Selby says: “Today’s much anticipated barrage of publications from HMRC ended up being the dampest of squibs.
“While reforms to modernise the way tax is administered in the UK, reduce the IHT burden on non-taxpaying estates and deal with tax avoidance are all laudable, this feels like a missed opportunity to tackle some fairly obvious flaws in the system.
“Higher-earning retirement savers – particularly those in public sector defined benefit schemes – will be relieved rumoured reforms to pension tax relief have not materialised, although given the parlous state of the UK’s finances it would be no surprise to see this back on the table in the not-too-distant future.
“Similarly, landlords, property investors and those with assets held outside tax-efficient wrappers like pensions and Isas will also be breathing a sigh of relief that capital gains tax (CGT) will stay intact for another tax year at least.
“The Office of Tax Simplification (OTS) previously backed aligning CGT and income tax rates, which many expected would pave the way for an immediate overhaul. Like pension tax relief, while this has been shelved for now it could resurface further down the line so investors should make the most of their pension and Isa allowances to shelter as much of their long terms savings from the tax man as possible.”
Barnett Waddingham self-invested technical specialist James Jones-Tinsley says: “It’s a tale as old as time – a much anticipated day of policy reform has left the pensions industry shocked by the deafening silence of the Government on the issues that matter most. With barely a bullet point dedicated to a handful of technical updates, trustees, advisers, and savers alike have been disappointed.
“At the very least, a simplification of pension tax relief is well overdue – and in fact, it was a manifesto commitment of this Government to support the 1.5m low-paid workers, mostly women, harmed by the tax relief discrepancy between ‘relief at source’ and ‘net pay’ workplace pension schemes. We should have seen a scrapping of the Money Purchase Annual Allowance (MPAA), which has been revealed as negatively impacting 1,000 savers each working day, as well as the abolition of the harmful Tapered Annual Allowance (TAA). Instead, the Treasury has squandered the opportunity to make real change – and the clock is ticking. If we don’t see action soon, the UK’s looming pensions crisis is only going to get worse.”