The cost of income tax relief on pension contributions in 2022/23 is estimated at £27bn, having passed the £50bn mark for the first time in 2021/22, according to the latest figures from the Office for National Statistics (ONS).

The update showed that national Insurance contributions to, and benefits from, registered pension schemes provided £24.7bn of relief, representing an £8bn increase over the past five years, while income tax relief was estimated to have cost £26.9bn in 2021/22.

This saw the total cost of pensions tax relief passed £50bn for the first time in 2021/22, at a total of £51.6bn, while further increases are expected, with the cost of income tax relief on pension contributions for 2022/23 estimated at £27bn.

Industry experts attributed the increasing cost of tax releif to the success of auto-enrolment (AE), alongside the impact of wage growth, with Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, highlighting AE as "an enormous contributor".

“Pension tax relief is a real hidden hero of pensions with an £80 contribution from a basic rate taxpayer boosted to £100 while a higher rate taxpayer needs to contribute just £60 to get the boost to £100," she stated.

However, Morrissey acknowledged that "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".

"For years there’s been speculation government might be tempted to trim tax relief to cut costs – so far, it’s been resisted but with budgets under pressure it may prove too tempting a prospect to leave," she added.

Yet LCP partner, Steve Webb, argued that the increased cost of tax relief should not be used as a justification to make further cuts in the limits on tax relief, pointing out that there are other factors affecting the cost of tax relief.

For instance, Webb noted that employers continue to make multi-billion-pound contributions into DB pension schemes to deal with historical deficits, explaining that whilst these payments increase the apparent ‘cost’ of pension tax relief, they provide greater security that member benefits will be paid in full, and are to be welcomed.

Webb continued: “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 ten million 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”

This was echoed by AJ Bell head of retirement policy, Tom Selby, who stressed that while the cost of incentivising people to save for retirement is, on the face of it, “eye watering”, “this isn’t money down the drain”.

He stated: “As we edge closer to the March Budget and with the Chancellor looking for cost savings, these latest figures will inevitably be seized upon by some as evidence pension tax relief should be fundamentally reformed.

“Discussions about the future of pension tax relief need to be focused squarely on ensuring more people are encouraged to save a decent amount for their financial future.

"Raiding pensions for short-term gain without considering the potential long-term consequences – something we have seen far too much of in the last decade – would risk undoing the early positive impact of auto-enrolment.

“Given the financial challenges facing millions of people already, saving for retirement likely already feels like a stretch for many. Any shift in the rules which undermines incentives to save for the long-term would risk being the straw that breaks the camel’s back.”

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