The estimated cost of pension tax relief is set to hit a record £41bn

HMRC’s latest estimates on the cost of principle tax relief shows that for 2017/18 the cost of pension tax relief is predicted to hit £24bn. The addition of £16.9bn in national insurance relief on employer contributions takes the total cost to £41bn.

Plans to increase minimum auto-enrolment contributions, scrap the earnings band and extend the reforms to 18 year-olds will raise the cost of tax relief still further according to AJ Bell.

AJ Bell senior analyst Tom Selby said: “The cost of pension tax relief continues its seemingly inexorable rise as automatic enrolment drives a retirement savings revolution in the UK. These costs will increase still further as minimum auto-enrolment contributions are ramped up and plans to scrap the earnings band and extend the reforms to 18 year-olds are implemented. With anaemic GDP growth putting pressure on public finances and the government desperate for funds for other areas such as the NHS, the eye-watering cost of incentivising people to save for retirement will inevitably come under the Treasury’s microscope once again.

“This is understandable but it is vital any future reforms to the system are carried out in a measured way, taking into account the risk that cutting back pension tax relief will put people off saving and see them fall back on the state in the future. We believe the best way to do this is to establish a commission, independent of government, to take a sober look at the existing framework and propose reforms based on the long-term interests of savers. The recommendations of this commission could form the basis of cross-party agreement to deliver stability in the pension system – something which has been successfully delivered in other countries.”

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