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At present the UK pensions tax system generally exempts contributions, exempts growth as it accrues and levies tax on withdrawals. The current system already provides for some of the tax relief on contributions to be clawed back through annual allowances.

Recent recommendations from include reforming income tax relief on pension to a single flat rate of relief of 25 or 30 per cent, quoting that tax relief on pension contributions is estimated to be worth £66bn in 2022/23. puts the estimated net cost of pensions tax relief, ie the cost of relief on contributions less income tax on pensions in payment and certain other pension tax charges, at a lower figure of £48.7bn in 2022/23. This is a substantial amount, being almost three times as much as the capital gains tax receipts for the same year. Commentators frequently point to perceived unfairness that more than half of that tax relief went to upper and additional rate taxpayers. 

The recently modelled the impact of restricting upfront tax relief to 30%. Despite the total sums of tax relief quoted, the IFS estimates that such a limit would only lead to a £2.7bn increase in tax. Other estimates completed by the put potential tax increases at only £1.5bn. The IFS also comments that under such a reform, a cap would redistribute the burden of taxation to the top 20% of earners, but HMRC themselves highlight that estimates of the cost of pensions tax relief is not the tax yield that would be expected from changing the tax treatment of pensions, as there would be significant changes in behaviour.

While the IFS modelled this commonly advocated reform to the tax treatment of pension contributions, it did not recommend it. Whatever arguments are made around the fairness of retaining upfront tax relief on pension contributions, there is a crucial practical issue to be overcome of how employer contributions to defined benefit arrangements would be taxed. The IFS point out that with half of upfront income tax relief going to those in defined benefit arrangements, getting this right would be extremely important but very difficult to achieve. 

On the face of it, while limiting tax relief on pension contributions appears to offer a potential silver bullet, the reality of limiting the relief is much more difficult and perhaps surprisingly, not that valuable. The IFS report points out that the current system of pensions taxation is a generous one with too many features that are arbitrary, wasteful or unfair, but there are plenty of other tools capable of effecting redistribution. While there are good reasons for the government to encourage those who are at risk of under-saving for retirement, the scale of pension wealth is huge, and mistargeted tax rules can be costly. 

Come October, the Chancellor may look to a different package of pension reforms which could raise more revenue than limiting tax relief on contributions, including increasing taxes on pensions in retirement by cutting the tax-free lump sum, subjecting pension pots to inheritance tax on death and reforming national insurance on pension contributions, which the IFS and some other think tanks do agree on.