Pensions tax relief totalled an estimated £42.7bn in 2020/21, according to the latest government figures, with £22.9bn of this stemming from tax relief in income tax and £19.8bn in National Insurance contributions.

In particular, the data revealed that public sector employee contributions had seen an increase in pensions tax relief, receiving £3.3bn of the £5.4bn in occupational scheme relief on employee contributions in 2019/20, compared to £3bn in 2016/17.

Over the same period, private sector employees received tax relief totalling £2.1bn, up from the £1bn recorded in 2016/17.

In addition to this, employer contributions to occupational schemes received £21.1bn in tax relief throughout 2019/20, with £8.6bn of this going to public sector, while the share of relief going to the private sector fell by 4 percentage points over the four years prior.

The figures have also reflected the ongoing shift from defined benefit (DB) to defined contribution (DC), revealing that while employer tax relief on contributions to DB pensions increased by £400m to £15bn over the four years to 2019/20, tax relief on contributions to DC schemes also increased by around £4bn to £11.5bn over the same time period.

In its cost analysis, the government acknowledged that the nominal cost of registered pension schemes has increased from 2016 to 2017 until 2020 to 2021, with the cost as a proportion of GDP having also increased up to 2020 to 2021.

It attributed this increase to automatic enrolment and pensions measures, which generated upward and downward pressures on cost respectively.

Commenting on the figures, AJ Bell head of retirement, Tom Selby, warned that whilst the raw cost of pension tax relief is "always going to appear eye-watering, and the 2020/21 estimate of over £42bn certainly falls into that category", this does not include money received by the Treasury via income tax on pensions in payment.

"When that is taken into account, the net cost of pension tax relief in 2020/21 was estimated at £22.9bn in 2020/21, with an expectation this figure will fall to £22.5bn in 2021/22," he explained.

“What is often missed in analysis of pension tax relief – in particular by those who eagerly push for radical reform such as scrapping higher-rate relief – is how that relief is distributed.

“Dealing with DB schemes – the majority of which now reside in the public sector - has always been the biggest challenge to seismic pension tax relief changes both practically and politically, and these figures lay that challenge bare.”

Selby also noted that public sector DB workers and employer pension tax relief had both taken "a huge chunk of the overall bill", arguing that any reform to pension tax relief would again have to answer questions around how employer relief would be dealt with.

"It would also effectively represent a tax hike for higher earning public sector workers, including doctors, dentists and senior teachers," he continued.

However, Selby emphasised that, at a more fundamental level, the fact pension tax relief costs have risen in recent years in part reflects the success of automatic enrolment, suggesting that it should therefore be welcomed.

“The pandemic has understandably dominated the national conversation for the past 2 years but ensuring the UK’s ageing society save enough for retirement remains arguably the greatest public policy challenge of modern times," he said.

“Pension tax relief is simply an investment in ensuring future generations are more able to provide for themselves in later years and therefore less likely to fall back on the state.”

Adding to this, Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, commented: “Every year we have speculation about whether the Budget will bring cuts to pension tax relief and looking at these figures you can see why the temptation is there.

“While DB pensions still account for a lot of the cost, we can see the increasing impact of auto-enrolment with tax relief for defined contribution schemes on the rise.

“However, it also highlights the huge issue of getting self-employed people to contribute to a pension. Clearly, they are not helped by an employer contribution but the estimated cost for this group accounted for less than 1 per cent of tax relief.

“OBR predicts average earnings will fall next year and this will bring a corresponding decrease in pension tax relief. Whether this will be enough to stop the government trimming pension tax relief to pay its enormous Covid bill in the near future remains to be seen."

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