Govt urged to consider flat pensions tax relief rate as high earners leave £2.5bn unclaimed

The government has been urged to “level the pensions playing field” by scrapping differential rates of pensions tax relief, after PensionBee found that around £2.5bn of tax relief for higher earners was going unclaimed.

The figures, obtained via a freedom of information request to HMRC, showed that over 1.5 million of the UK's highest earners failed to claim an estimated £810m in tax relief in the 2018/19 financial year, totalling around £2.3bn between 2016/17 and 2018/19.

Additional rate taxpayers, meanwhile, overlooked a total of £164.7m in the same three year period.

The research showed that an average of 80 per cent of higher rate taxpayers eligible to claim relief through their self-assessment tax returns failed to do so over the three-year period, alongside an estimated 53 per cent of additional rate taxpayers.

The number of taxpayers failing to claim beyond the basic rate of tax relief remained consistent at around 1 million between 2016/17 and 2018/19 for higher-rate taxpayers, according to the figures.

In 2018/19 alone, this equated to an estimated £756.2m in unclaimed tax relief on personal pensions amongst higher rate taxpayers, although this is slightly down from the £769.4m in 2017/18.

The number of additional rate taxpayers failing to claim has also fallen from its three year peak of 72,262 in 2017/18 to 58,690 in 2018/19, although an estimated £54.6m is still going unclaimed in 2018/19, compared to £60.5m in 2017/18.

In light of the findings, PensionBee explained that eligible higher and additional rate taxpayers would need to complete a self-assessment, despite being employed and usually handling their tax matters exclusively via payroll.

It also called on the government to take action by scrapping the differential rates of tax relief to ensure a "level playing field", recommending a 25 per cent universal rate instead.

PensionBee CEO, Romi Savova, commented: “Tax relief is a vital incentive that encourages people to save efficiently towards their retirement and too many people continue to miss out on this crucial benefit.

“Research shows that consumers on lower incomes, and particularly women, do not receive any of the tax benefits that come with pension saving, because they are currently under the basic rate threshold.

“While at the other end of the spectrum, today’s analysis shows that millions of high earners are also missing out by not completing their self-assessment.

“The dual system is too complex and radical reform is long overdue. We’re calling on the Chancellor to scrap differential rates of tax relief, which are incredibly costly and complicated to understand, in favour of a system that truly rewards everyone for putting money away for their retirement."

However, analysis from the Pensions and Lifetime Savings Association previously suggested that tax relief changes would "create few winners", with industry experts warning against a 'budget raid' after the cost of pensions tax relief was revealed earlier this year.

industry experts have also previously warned that a 25 per cent flat rate pension tax relief would only generate around £0.6bn in savings for the government, amid speculation the government may look to the pensions sector to fund a post-pandemic recovery.

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