The cost of pension tax relief is set to hit £43.7bn for 2018/19, an increase of £2bn on the previous financial year.
Figures released today (January 31) by HM Revenue & Customs (HMRC) showed a forecast of income tax pension relief of £24.3bn, which adds to £18.1bn for a national insurance exemption on pension contributions from employers.
Employers have to make a minimum 2 per cent contribution to their employees’ pension under auto-enrolment rules. These payments are exempted from paying national insurance under legislation published in 2006
Chancellor of the Exchequer Philip Hammond said he considers tax relief to be "eye-wateringly expensive".
Tom Selby, senior analyst at AJ Bell, said today’s figures ignored the amounts that "tax savers pay when they take an income from their pensions – a number which has risen as a result of the flexibilities intruded by George Osborne almost four years ago".
He said: "While rumours of radical tax relief reform will inevitably surface once again in 2019 – particularly in the event of a potentially damaging no deal Brexit – policymakers need to consider the impact any changes would have on the fragile savings culture being fostered in the UK as a result of automatic enrolment.
"Tax relief is one of the key incentives offered to savers in return for locking their money away until age 55. Raiding tax relief to fund short-term spending could cause people to reconsider the value of this deal, potentially reducing savings levels and storing up more problems for the future."
The HMRC figures also showed taxpayers saved a total of £27.2bn in 2017/18 in income tax by investing in Isas and pensions.
Individuals saved £2.9bn on Isas alone in the last fiscal year, up from 2.7bn a year earlier. On pensions, taxpayers saved £24.3bn in income tax, up from £23.5bn in the previous year.
For 2018/19, the government has estimated savings of £3.15bn in income tax on Isas and £25.6bn on pensions.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said savers know putting money into an Isa or pension allows income tax savings, but it’s easy to forget just how much these amount too.
She said: "These figures show that between them, they slash our tax bill by a jaw-dropping £27.2bn. And that’s just in income tax - stocks and shares Isas are saving us a small fortune in capital gains tax too.
"When you’re making a real effort to put money aside, it’s incredibly frustrating to have to watch the taxman swoop in and take a generous slice. By using a tax wrapper like an Isa or pension, you can keep his grubby mitts off your money, hang onto that slice for yourself, and reap the full rewards of all your efforts."
Nathan Long, senior analyst at Hargreaves Lansdown, noted the amount of tax savings keep rising as individuals are being asked to pay more into their workplace pensions.