Pensions boosted by ‘hidden hero’ – but Rishi Sunak may change it to ‘cut costs’ | Personal Finance | Finance
Recent statistics published by the Office for National Statistics (ONS) have shown pension schemes saved Britons some £26.9billion in income tax in 2021/22. This is up by £7.1billion over five years, and the amount of savings from pensions is set to increase, saving individuals £27billion this year.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, has unpacked how Britons have been able to save so much.
She pointed towards tax relief as the key source of savings.
Ms Morrissey said: “Pension tax relief is a real hidden hero of pensions with an £80 contribution from a basic rate taxpayer boosted to £100 while a higher rate taxpayer needs to contribute just £60 to get the boost to £100.
“However, relatively few people have even heard about tax relief, never mind understand it, and so do not realise the impact it can have.
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“For years there’s been speculation Government might be tempted to trim tax relief to cut costs.
“So far, it’s been resisted but with budgets under pressure it may prove too tempting a prospect to leave.”
At present, there are two ways Britons could get tax relief on their pension contributions: relief at source or net pay.
But for those in a workplace scheme, their employer will choose which method to use.
With relief at source, contributions get a boost from the Government, and people could potentially get more back through a tax return if paying tax at the basic rate.
Conversely, with net pay, pension contributions are made before a person is taxed.
When it comes to this method, people usually pay less tax, as their tax is calculated based on a lower amount of earnings.
There is no current limit on the amount that can be saved into a pension each tax year.
But with that being said, there are limits on how much a person can save with tax relief before a tax charge might apply.
For most people, the annual allowance is £40,000, but this could differ in certain circumstances.
The amount a person can save throughout their lifetime while still benefitting from tax relief is called the Pension Lifetime Allowance.
This is currently set at £1,073,100, and frozen by Mr Hunt until 2028, it was confirmed in the recent Autumn Statement.
