Income tax saved on pensions up 27% in past year

Savers want to avoid any crackdown on pension tax relief to pay the country’s Covid-19 bill.

Increasing numbers of savers are putting money into their retirement pots as many seek to avoid any clampdown on pension tax relief, official data suggests.

Everyone receives a government boost on their retirement savings contributions. This comes in the form of tax relief, where the government takes what you would have paid in income tax and puts it in your pension instead.

It is known as pension tax relief, and the basic 20% rate is taken automatically, while those paying the higher or additional rate of tax must claim for it through their self-assessment tax return.

The latest Office for National Statistics data shows the total amount of income tax saved by individuals investing in their personal pensions jumped by 27% in the most recent tax year to £2.8 billion.

This was up from £2.2 billion in the 2018-19 tax year and £1.9 billion a year before.

Some commentators have suggested the Treasury could cut the relief for high earners to the basic rate, which would save it money and increase the government’s tax take.

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The Treasury has already made significant cuts to both the lifetime and annual pension allowance in recent years to increase tax receipts.

The lifetime pension allowance has been reduced from £1.8 million in 2012 to £1.07 million in 2021, while the annual allowance has dropped from £50,000 to £40,000 over the same period.

There are often rumours in the run-up to the Budget that tax relief for high earners could be the next victim of government cost savings.

Advisers at Salisbury House Wealth suggests this is one reason that people are increasing payments into their pensions ahead of possible changes.

Tim Holmes, managing director of Salisbury House Wealth, says: “Pensions are the bedrock of retirement planning and savers should take full advantage of all the tax-free pensions allowances while they can.” 

“The chancellor is currently looking at ways to cover the enormous Covid-19 debt bill that is growing by the day and there is the concern that cutting the pension allowance could be one solution.”

He warns that the government should act with caution as cuts to the allowance could lead to people not saving enough for their retirement, which would cause significant problems in the future.