Pension savers are on alert amid growing expectations that tax relief could be reshaped as the cost to the Treasury continues to surge.
With the bill for pension tax incentives now edging towards £60billion, experts are urging Rachel Reeves to make some assurances to avoid savers making moves ahead of potential changes in a future Budget.
Fresh figures from HMRC reveal the total cost of pension tax relief has reached an estimated £59.1billion for 2025/26, representing a dramatic increase of nearly £11billion over the past five years.
The ballooning expense is heaping pressure on the Chancellor ahead of future fiscal events, with industry experts warning that continued speculation risks undermining confidence among those saving for retirement.
According to Charlene Young, Senior Pensions and Savings Expert at AJ Bell: “The cost of retirement tax incentives is within touching distance of £60billion, once the tax collected on pension withdrawals has been deducted. In economic terms, that translates to roughly two per cent of the UK’s GDP.”
Income tax relief has experienced the most substantial growth, climbing by more than a third over five years. Ms Young notes this amounts to “£8.5billion in cash terms” during that period.
By contrast, NIC relief actually declined during 2023/24 and 2024/25, a trend attributed to the alignment of the NI primary threshold with the income tax personal allowance in July 2022, alongside subsequent cuts to employee NI rates.
Pension income tax relief has now overtaken private residence relief, which stands at £32.9billion.
The Government opted not to alter pension income tax relief or tax-free cash entitlements in November’s Budget, instead targeting NI exemptions linked to salary sacrifice arrangements.
How much pension tax relief you can get depends on your earnings
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AJ Bell analysis of HMRC data
However, Ms Young warns that speculation ahead of fiscal events poses ongoing risks: “Many people had already made decisions based on pure speculation, and there remains a huge risk that the same will happen again ahead of the next Budget unless the Government provides certainty to savers on pension tax incentives.”
Several factors have driven the sharp rise in costs such as higher wages that have pushed up the value of pension contributions. Changes to allowance rules have also played a significant role.
The increase to the pensions annual allowance and scrapping of the lifetime allowance have both contributed to the expanding bill.
The mechanics of pension tax relief offer significant advantages for savers. Contributions made into a pension are exempt from income tax at the point of payment, with taxation instead applied when funds are withdrawn during retirement.
The ballooning expense is heaping pressure on the Chancellor ahead of future fiscal events
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GETTYMs Young explains that this deferral represents a powerful incentive: “That’s after another incentive tax-free cash which is usually up to 25 per cent of your pension value when you access it.”
The system works particularly well because most retirees have lower incomes than during their working years, meaning they face reduced tax liabilities when accessing their pension pots.
The amount of relief available depends on individual earnings and tax rates, with Scottish taxpayers subject to different bands and rates compared to the rest of the UK.
Fresh figures from HMRC reveal the total cost of pension tax relief has reached an estimated £59.1 billion for 2025/26
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GETTYThe breakdown of costs reveals income tax relief accounted for £33.5billion in 2025/26, while National Insurance Contribution relief totalled £25.6billion.
Ms Young argues the Chancellor retains the ability to reassure savers, adding: “As the pensions landscape continues to move from the old world of pension promises and defined benefit schemes to an era of pension pots, it’s crucial that nothing undermines the confidence of people putting away their own money for the long term.”