Figures published today (30 April) by HMRC put the gross cost of pension tax relief at £38.4bn in 2017-18, up from £37.3bn in 2016-17, but still slightly lower than the £38.6bn in 2015-16.
The small increase in the tax relief bill was despite millions of workers being enrolled into workplace pensions in recent years, which suggests that the amount of tax relief being by each saver is coming down.
Steve Webb, director of policy at Royal London said: "The Treasury needs to make up its mind whether it wants more people to save in a pension or not. What is remarkable is how little the cost of pension tax relief has risen in recent years given the millions of extra workers who have been automatically enrolled into workplace pensions.
"Every time the Treasury attempts to cut the cost of tax relief they add new complications such as the ‘tapered annual allowance’ and the ‘money purchase annual allowance’ which make the system bewilderingly complicated. These new figures provide no justification for further fiddling and salami slicing with a system that should be stable over the long-term."
According to the figures, £16.3bn was granted in pension national insurance relief, up from £15.5bn in 2016-17.
For 2016-17 the effective tax relief granted is 40 per cent suggesting there were few basic rate tax payers taking advantage of saving for retirement, analysis by Hargreaves Lansdown has found.
Altogether the figures show that there was £48bn in tax and NI relief granted on pension contribution in 2017-18.
The chancellor of the exchequer, Philip Hammond, has previously said pension tax relief was "eye-wateringly expensive" and "extraordinarily generous" which has prompted speculation he may try to reform the system.
Nathan Long, senior analyst at Hargreaves Lansdown, said: “The cost to the taxpayer of providing our pensions has remained flat as Treasury measures designed to limit contributions from the highest earners begin to bite.
"These tweaks are impacting heavily on certain professions, despite occupational schemes accounting for the lion share of the tax relief cost, as employers are still required to shovel money into their defined benefit pensions to prop them up.
"Delve deeper and there are clues that all but the highest earning self-employed workers are turning their backs on pensions. It’s a reminder that a lot rests on the government’s work where they’re testing nudges to boost saving among the self-employed. If this proves ineffective a more radical shake up to the incentives will be required," he said.
There are two types of tax relief paid into workplace pensions. These are the net pay arrangement and relief at source.
Net pay arrangement works by deducting pension contributions from the salary people receive from their employer before income tax is calculated on it, so they get relief on the amount immediately at their highest rate of tax.
Relief at source arrangements are used by personal and stakeholder pensions and some auto enrolment workplace pensions. It works by taking the pension contribution after income tax has been deducted.
The HMRC figures also showed £27.5bn was contributed to personal pensions in 2017-18, up 0.4 per cent from £27.4bn in 2016-17.
The number of individuals contributing to personal pension schemes also increased to 8.5m in 2019-17 with annual average contributions per person hitting £3,200.
But there were still more men than women contribution to personal pensions.
Ian Brown, pensions expert at Quilter, said: "These figures don’t tell the full story as there remain pension inequalities throughout the nation. The split between men and women contributing to pensions remains 40 per cent women and 60 per cent men across all age groups.
"We need to understand why and if policy is playing a role in that. Gender pension inequality has no place in the modern day.
"Still pensions tax relief is still costing the government an eye watering amount at £38.4bn in 2017-18 up from £37.3bn in the previous year. Government then face a tough balancing act of granting tax relief, but also balancing the books to ensure it doesn’t contribute to bankrupting the country."
amy.austin@ft.com
