Savers automatically receive tax breaks on their contributions to a company or private pension scheme to encourage them to save for the future rather than relying solely on the state pension. However, this burden on the Treasury massive. Now Sunak could be forced to act.
Britons who save into a pension scheme automatically receive an income tax reduction of 20 percent on their contributions.
This means that every £ 100 pension that goes into their pot will cost them only £ 80 in practice.
Taxpayers with a higher tax rate of 40 percent can claim further relief through their tax return for self-assessment. You only pay 60 pounds to 100 pounds to get pension.
The estimated cost to the Treasury Department in fiscal year 2020/21 was a whopping £ 42.7 billion in income tax and national insurance revenue, new figures show.
The company pension scheme with automatic enrollment has increased the bill by granting a company pension to millions of mostly poorly paid workers for the first time.
Now experts fear that HM Revenue & Customs’ generosity may not last.
In every household there is speculation that the Chancellor will cut the pension tax relief in order to protect the state coffers.
That day could come soon, said Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown. “When you look at the latest numbers, you see the temptation. It’s a huge burden on the government.”
Average earnings are likely to fall next year, according to the Bureau of Budgetary Responsibility, but Morrissey said, “Whether that will be enough to prevent the government from cutting pension tax breaks to pay their huge Covid bill remains to be seen.”
The sum of the tax breaks for pensions is “an eye catcher,” said Tom Selby, head of pension policy at AJ Bell.
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This will save HM Revenue & Customs a fortune and could be sold as a fairer scheme as base taxpayers actually get more relief, Evennett said.
According to current Shock news this option might come back to the table.
If Sunak cuts higher pension tax breaks, it is time to act, said Andrew Tully, technical director at Canada Life. “Those who can afford to pay into their retirement at higher tax rates may want to do so now.”
Under the current system, a 40 percent taxpayer who invested the maximum of £ 40,000 in his pension this year would receive £ 16,000 in tax relief.
Tully said if the tax break were cut to 20 percent, the tax break would only be worth half – meaning they’d get £ 8,000 less.
We can’t say for sure what the Chancellor should do now, but it is always wise to take full advantage of tax breaks when you can afford it, Tully added.