The official data on tax relief showed total pensions tax relief was £51.6 billion in the tax year 2021 to 2022, including £26.9 billion income tax relief and £24.7 billion relief from National Insurance contributions.
The government expects pension income tax relief to rise slightly to £27 billion in the 2022/23 tax year as wages rise. The main drivers of increases in pension tax relief over recent years have been Auto-Enrolment and wage growth, according to the analysis.
Nearly 8 out of 10 UK employees had a workplace pension in April 2021, with occupational schemes accounting for 69% of income tax relief. Higher rate income tax relief accounted for 52% of relief; 42% for basic rate relief and 6% for additional rate relief.
Despite the significant uplift to contributions that tax relief offers (a £100 contribution from a basic rate taxpayer becomes £125 with a tax top up), in its evaluation of the statistics, the government pointed to a lack of awareness of tax relief among workers from a 2015 study, suggesting that the system may not be fulfilling its job of providing an incentive to save and highlighting that most people would be willing to consider an alternative system. It said: “The government provides pensions tax relief to encourage individuals to take responsibility for retirement planning and to recognise that pensions are longer-term than other forms of saving. HMRC commissioned independent research with individuals and employers on pension tax relief in 2015. The research concluded that only 41% of adults correctly believed that the government tops up people’s pension contributions through tax relief.
“Many people underestimated the amount of tax relief the government provided on pension contributions. Given their lack of awareness, most people were willing to consider an alternative pension tax system, although this would not necessarily change the amount they saved.”
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “The government’s evaluation of pension tax relief as a benefit people are mostly unaware of suggests the system may be on the slab for changes, particularly as it is expected to cost the government more as a result of wage inflation this year.
While it would be a greater incentive to save more into a pension if people understood it better, tax relief goes on, quietly offering a significant and necessary boost to workplace pension contributions - particularly as the Automatic Enrolment minimum, at 8%, is not as high as it should be.
Reform of tax relief has long been mooted as a clear cost saving for the government. If 2023 is the year it happens, it would be good to see other policies, such as raising the Auto-Enrolment minimum, coming in, to protect people’s retirement outcomes at a time when it is harder than ever to build up long-term wealth.”
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