Not the time to alter tax relief on pension contributions

13 October: ICAEW has questioned whether it is the right time to change rules on tax relief on pension contributions which would increase administrative burdens.

ICAEW’s Tax Faculty has expressed this view in its response ICAEW REP 90/20 to a call for evidence from HM Treasury on tax relief on pensions tax relief administration published on 21 July 2020.

The government is concerned about the potential for a low-earning individual’s take-home pay to be affected by the method of pensions tax relief operated by their pension scheme.

The question is one of policy, ie should pension scheme members who are non-taxpayers receive a top-up equivalent to basic rate tax on their pension contributions and if so, should the top-up be paid to the member or into their pension pot.

ICAEW acknowledges that the 2006 A-Day and numerous subsequent changes have increased complexity but argues that the current rules are widely understood and work for the majority.

In its response to the call for evidence, ICAEW warns that there is a danger that the potential complications of further changes could outweigh the benefit – especially at present when businesses have other pressing priorities.

The proposal in the call for evidence that ICAEW believes is most worthy of consideration is Approach 1, which appears to be based on Budget representations submitted in September 2018 by the Low Incomes Tax Reform Group and updated in September 2019 by the Net Pay Action Group.

ICAEW recommends that the options that are taken forward are benchmarked prior to implementation against its Ten Tenets for a Better Tax System.