Income tax relief on pension contributions is expected to cost the government £21bn this year, with national insurance relief to hit £18.7bn, according to official figures.
Latest data from HM Revenue and Customs, published today showed income tax relief on pension contributions is estimated to cost £21.2bn in 2019/20, up 4 per cent from £20.4bn in the previous year.
Tax relief on pension contributions is paid at the saver’s marginal rate of income tax, meaning basic rate taxpayers get 20 per cent pension tax relief, increasing to 40 per cent for higher-rate taxpayers and 45 per cent for additional-rate taxpayers.
HMRC also estimated that national insurance tax relief for employers and employees on their pension contributions will cost £18.7bn this year, up 7 per cent from £17.4bn in 2018/19.
Stephen Lowe, group communications director at Just, said tax relief should not be viewed as a cost tothe taxman as it benefits taxpayers in the long-term.
Mr Lowe said: “Cost is a short-term way of looking at it because really this describes investment in the living standards of our future retirees.
“It’s unfortunate we have to describe pension tax relief as a ‘cost’ on society because it immediately suggests it’s a burden on the taxpayer.
“Relief from tax is a core incentive to encourage people to think long term and reduce the burden on future governments.”
HMRC did not explain why it expects tax relief costs to increase.
This week, the pension industry heavily criticised proposals made by a right wing think tank to scrap pensions tax-free cash to fund an abolition of inheritance tax.
Under the pension freedoms reforms most pension savers over the age of 55 are entitled to take some or all of their pension savings in the form of a cash lump sum, with the first 25 per cent being tax-free.
But Mark Littlewood, director-general of the Institute of Economic Affairs, has called on the government to end this tax benefit as it is not “justified” and said instead these funds could go towards reducing or eliminating inheritance tax.