The estimated costs of income tax relief on pension contributions stands at almost £27bn, up from less than £20bn five years ago, according to latest figures.
Data from HM Revenue and Customs, published this morning (January 12), showed in 2022-23 the cost of tax relief on registered pension schemes sat at £27bn, up slightly from £26.9bn the year before.
This figure includes relief on contributions, relief on investment returns, and tax paid in retirement (net of 25 per cent lump sum).
According to pension consultants LCP, the increased cost of tax relief is in large part due to the success of government policies such as automatic enrolment, and should not be used as a justification by the chancellor to make further cuts in the limits on tax relief.
For example, the minimum contribution rates for automatic enrolment increased in April 2019 which would have increased contributions and hence the cost of relief.
The minimum contribution rate was initially 2 per cent when automatic enrolment began in 2012 but was increased to 5 per cent from April 2018 and 8 per cent in April 2019.
LCP said since 2019-20, the nominal cost of income tax relief has risen by 17.4 per cent (up from £23bn to £27bn) but this is broadly in line with inflation over the same period.
An increased headline cost of tax relief is to be expected as prices and wages go up and does not mean that tax relief has suddenly become “too generous”, the consultants said.
Steve Webb, a partner at LCP said: "If the cost of pension tax relief is rising this should be a cause for celebration not a justification for cuts. The government has actively encouraged more than 10mn people to start saving for a pension and has stepped up the mandatory level of pension contributions.
"All of this will increase the headline cost of pension tax relief. But this is a sign of the success of the policy.
"Likewise, if companies put more money into their defined benefit pension schemes to make sure pension promises to date are kept, this is to be welcomed even if it increases the cost of tax relief.
"The government needs to decide if it wants more people to save in a pension or not. If it does, then constant tinkering and cuts to tax relief is not the way forward.”
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said many people did not realise the impact pension tax relief could have on their savings.
“As we come up to self-assessment deadlines it is a timely reminder for higher rate taxpayers to check to see if they are claiming their higher rate relief or they risk missing out.
“On the flip side there’s no getting away from the huge cost of pension tax relief to government and it’s only likely to go higher as more people are enrolled and wages grow.