HM Revenue & Customs (HMRC) has revealed the data relating to the cost of tax reliefs for the 2021-22 financial year.
One of the most salient figures is the pension tax relief total, which hit £51.6bn ($62.6bn, €58.2bn) in the period.
According to the taxman, the sum is made up of the upfront tax relief savers receive on their personal contributions (£26.9bn) and the national insurance relief that applies to both employees’ and employers’ contributions (£24.7bn).
The staggering sum is cause for celebration as this means more people have started saving into a pension.
Tom Selby, head of retirement policy at AJ Bell, said: “The cost of incentivising people to save for retirement is, on the face of it, eye-watering, with the ‘net’ annual bill – taking into account tax raked in from pension withdrawals – estimated to have surged past £50bn in 2021/22.
“Over the last five years alone, the cost of pension tax relief has swelled by around £15bn. It’s important to remember this isn’t money down the drain, however – it simply reflects a combination of the success of automatic enrolment in boosting savings levels in the UK and increased wages over that period.
“What’s more, every pound saved in a pension should help reduce the risk of that individual falling back on the state in their later years.”
Think twice about cuts
But the worry now is that HMRC’s soaring figures will be used as evidence for legitimising any cuts to pension tax relief. However, Steve Webb, partner at LCP, says this is the opposite of what the government should do.
“If the cost of pension tax relief is rising this should be a cause for celebration not a justification for cuts,” Webb said. “The government has actively encouraged more than 10 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 (DB) 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.”
AJ Bell’s Selby agrees with Webb’s analysis. “At some point, the government will need to consider how to boost average pension contribution levels – although the pressure being placed on people’s incomes by spiralling inflation means that is unlikely to be a priority in the short-term,” he said.
“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.”