Pension tax relief saved Britons an estimated £32.3billion in 2024-25, an analysis of official figures by Hargreaves Lansdown shows.
According to figures published by HM Revenue & Customs last week, pension tax relief savings are expected to rise further to £33.5billion in 2025-26, against £25billion back in 2021-21.
Experts at Hargreaves Lansdown said several factors were behind the ‘huge rise’ in pension tax relief highlighted by the data from HMRC.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: ‘Increased wages are one, especially given frozen tax thresholds, pushing more people into paying higher rates of tax.’
The abolition of the lifetime allowance, an increase in the annual allowance and the lowering of the additional rate threshold have also contributed to this increase, Morrisey added.
Before the Autumn Budget in November, there was concern Rachel Reeves would target pension tax relief. In the end, however, Reeves opted to maintain the current regime.
However, sweeping changes to rules concerning salary sacrifice and national insurance contributions for pensions are coming from April 2029.
No change: Rachel Reeves opted to leave the pension tax relief system unchanged in November’s Budget
But the sizeable cost of subsidising pension savings via tax relief will always make it a tempting target when the Treasury looks for cost cuts.
How does pension tax relief work?
Pension tax relief is designed to encourage saving for retirement by refunding income tax on pension contributions. On the surface it looks like it is tilted in favour of the better-off, but this is because they pay higher tax rates and more tax – and so get a larger amoutn back.
The tax relief you can get on contributions makes pensions a very efficient way to save, particularly as many people are being pushed into higher tax bands due to Reeves freezing thresholds until April 2031 at the earliest.
The ‘stealth tax’ move means the level at which the 20 per cent, 40 per cent and 45 per cent rates of income tax kick in will have been unchanged between 2022-23 and 2030-31 instead of rising with inflation.
For most personal pensions, providers automatically add basic-rate tax relief of 20 per cent. But higher-rate taxpayers are entitled to claim back the difference between their marginal tax rate and the basic rate.
This means an additional 20 per cent for higher-rate taxpayers and an extra 25 per cent for additional-rate taxpayers.
Morrisey said: ‘Pension tax relief is a powerful incentive to save into a pension.
‘It means a basic rate tax payer contributing £80 will have it boosted up to £100 by tax relief.
‘A higher rate tax payer needs to contribute just £60 to get the same boost to £100.’
You can get pension tax relief on your contributions each tax year until you reach 75.
In most cases, pension tax relief is applied automatically by people’s employers, meaning they do have to do anything.
However, there are some important exceptions to this. If you are a higher or additional rate taxpayer, you should check how your employer applies the tax relief, because you may need to claim it yourself.
Morrisey said: ‘With the self-assessment deadline looming on the horizon, it is an important reminder for higher and additional rate tax payers to make sure they aren’t missing out on claiming their full rate of tax relief on their pensions.
‘They can claim any extra relief either online or through their self-assessment forms.’
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Pension tax relief is the ‘hidden hero’ putting an extra £32BN a year into savings