Cost of pension tax relief soars – but so does tax on pensioners’ – Steve Webb, LCP
Pensions & benefits Pensions tax Personal finance
New figures published today from HMRC show that the cost of income tax relief on pensions has soared from £47.8bn in 2022/23 to £60.4bn in 2024/25 (the latest year for which figures are available) – an increase of a quarter in just two years. However, the same figures show that the tax paid by people in retirement has also jumped – from £21.1bn in 2022/23 to £29.8bn – an increase of over 40% in two years.
One of the main reasons for these increases is likely to be ‘fiscal drag’.
The cost of pension tax relief is greater for higher rate taxpayers (who get relief at 40%) than for basic rate taxpayers (who get relief at 20%). As the number of higher rate taxpayers increases because of freezes in the higher rate threshold, so does the cost of tax relief. Separate HMRC figures show that the number of higher rate taxpayers in 2022/23 was 5.1m in 2022/23 and 6.6m in 2024/25, which is likely to have driven a lot of the increase in the cost of tax relief. And the latest HMRC figures show a further increase to 7.7m higher rate taxpayers in 2026/27, which suggests that the cost of tax relief will have risen further in the last couple of years (not yet reflected in the published statistics).
‘Fiscal drag’ and the freezing of personal allowances will also help to explain why pensioners are paying more tax. HMRC figures show that in 2022/23 the number of pensioners paying tax was 7.1m in 2022/23, 8.8m in 2024/25 and 9.6m in 2026/27, which is driving up the total tax take from pensioners.
Although the rising cost of pension tax relief might increase the chance of a cut in tax relief in the next Budget, this remains unlikely according to LCP partner Steve Webb. This is because any change – which could take time to implement - would raise the Government very little revenue this side of a 2029 General Election but would generate huge political opposition.
The constant freezing of tax thresholds and allowances has dragged millions more people into paying higher rates of income tax. The flip side of this is that when they pay into a pension they get more tax relief, leading the cost of tax relief to soar. But frozen personal allowances mean that the number of pensioners paying income tax has also written steeply, and the tax bill on pensioners is up dramatically. In all the discussion about fairness between generations, it is important to remember that pensioners are also paying growing amounts back to the Exchequer, paying around £30bn in income tax on their pensions in the latest figures.
Notes to editors
- The new figures on the cost of pension tax relief can be found in Table 6 here: Table_6.ods
- The (previously published) figures on numbers of taxpayers are here: Table 2.1 Number of individual Income Tax payers - GOV.UK
