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Low earners missing out on vital tax relief despite more saving for a pension

Basic rate taxpayers make up 83.4% of total taxpayers but only receive 26% of the pensions tax relief related to Defined Contribution pension contributions

The need to overhaul the UK’s pensions tax relief system is highlighted today by the publication of ABI commissioned research that shows that lower paid and the young are missing out on valuable tax relief.

The report from the Pensions Policy Institute (PPI) reveals that low earners are missing out on vital tax relief despite more saving for retirement. A DC pension scheme provides a retirement income that is based on the amount of money paid in and investment growth of this money. People receive tax relief from the Government when making contributions to a DC pension. In 2018, DC contributions represented just 17.5% (£9.3bn) of the total amount spent on tax relief (£53bn), despite the number of people contributing to workplace pension increasing to 87% from 55% in 2012.

Key Findings:

  • Basic rate taxpayers make up 83.4% of total taxpayers, they only receive 26% of the pensions tax relief related to DC pension contributions. 
  • The system favours higher earners. The number of people earning less than £30,000 who now qualify for tax relief has increased from 52% to 62% due to automatic enrolment. However, only 24% of tax relief goes to them.
  • More young people are paying into their pension, but the tax system benefits older people. 42% of people who contribute to a DC pension are under 40, but they only receive 27% of the available tax relief. People in their 40s and 50s receive two and half times as much tax relief from the Government.
  • Men receive the most tax relief, exacerbating the gender pensions gap. 71% of DC tax relief is granted to men, as they pay 69% of the contributions.

The research is the first of its kind since the 2016 Pensions Review and found tax relief could be distributed more fairly. According to the PPI, changing the current system to a single rate would increase the amount of pensions tax relief for the basic rate taxpayer from 26% to a more equal 42%.

The findings will inform the ABI’s wider policy work on simplifying pensions tax relief. The current pensions tax relief system is too complex. Years of tinkering have made it difficult for savers to plan for the long term. A change to the system is needed so it is simpler, fairer to all earners and encourages saving for retirement.

Yvonne Braun, Director of Long-Term Savings and Protection at the Association of British Insurers said:

Yvonne Braun“Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving. However, the distribution of pensions tax relief under the current system exacerbates existing inequalities, particularly between men and women.

“We hope the research will provide food for thought on how to make the system simpler and fairer.”

Tim Pike, Head of Modelling at the Pension Policy Institute said:

“While automatic enrolment has significantly increased the number of low earners benefitting from tax relief on DC pension contributions, half of the value of this relief goes to people earning £60,000 or more. A change to the system of tax relief on DC pensions could offer an opportunity to address the philosophy of the current system although implementation would present challenges.”



Notes for Editors

The research conducted by the Pensions Policy Institute, looks at the distribution of DC pensions tax relief between different income groups, age and gender as well as the cost to the Treasury.

Enquiries to:

Malcolm Tarling                        020 7216 7410    Mobile: 07776 147667

Laura Dawson                          020 7216 7338    Mobile: 0772 5245838

Sarah Aspinall                          020 7216 7408    Mobile: 0772 5245297

For enquiries to the Pensions Policy Institute please contact Danielle Baker on 07714 250 910 or danielle@pensionspolicyinstitute.org.uk   

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Last updated 23/06/2020