We know how much tax reliefs cost. Which ones do we want to pay for?

25 January 2017

George Bull

On 30 December 2016, HMRC published its latest estimates of the cost of various tax reliefs. Perhaps because of the publication date, these did not attract wide interest so HMRC republished the statistics on 20 January 2017. We have been taking a look at them.

The latest data records HMRC’s best estimate of the costs of a huge list of tax reliefs and exemptions. Some of these figures can be computed fairly precisely. However, for some others such as exemptions which reflect whether a person files a tax return or not, estimates have been used.

So why does this matter?

Regular readers of tax brief will know that there has been a considerable amount of debate during recent years as to how much the main tax reliefs cost and whether they are justified. HMRC has put a lot more effort into quantifying the costs, with both the National Audit Office and the Office of Tax Simplification providing commentary on what has been done, and what could be done differently.

As a result of all this activity, more and better estimates of the costs of tax reliefs are available.

For 2016/17, HMRC estimates the value of the top five tax reliefs as follows:

Ranking    Relief     Value 2016/17 £m 
 1    Income tax personal allowance    97,400
 2    NIC thresholds    54,440
 3    Registered pension schemes - tax and NIC    39,250
 4    Capital gains tax main residence relief    28,300
 5 =    Inheritance tax nil rate band    22,400
 5 =    Capital allowances    22,250

Nobody seems to be seriously challenging the value of the personal allowance or the various national insurance thresholds, and capital allowances are generally perceived to fulfil an extremely useful function in providing tax reliefs for businesses which translate into jobs, profits and taxes. But what about the other three reliefs, namely contributions to pension plans, capital gains tax main residence relief and the inheritance tax nil rate band?

To be honest, all the activity to date has been relatively academic, addressing questions to do with the measurement of the value of the tax reliefs given. 

What is needed now is a broader debate as to the social 'goods' which the UK wishes to achieve through the tax system, and the price it is prepared to pay for these. With the new Chancellor of the Exchequer Philip Hammond promising to avoid the ‘rabbit out of the hat’ surprises of his predecessor, now may be the time when we see the government moving towards a more measured debate on this subject. With Budget day set for Wednesday 8 March, we won’t have long to wait. For now, we hear more and more people promising to use valuable tax reliefs such as higher rate income tax relief for pension contributions, to avoid risking the relief being withdrawn at a later date. Time will tell…

For more information please get in touch with George Bull, or your usual RSM contact.