- The total cost of pension tax relief is estimated at £59.1 billion in 2025/26, new HMRC data shows (Source: Tax relief statistics (January 2026) | GOV.UK)
- This is a jump of almost £11 billion in the last five years
- Income tax relief was estimated to have cost the Exchequer £33.5 billion in 2025/26, with National Insurance Contribution (NICs) relief costing £25.6 billion
- Income tax relief alone now tops the cost chart, leapfrogging tax relief on selling main homes
- Rising wages mean the value of pension contributions accounts for the bulk of the increase, along with increases to the pensions annual allowance and the abolition of the lifetime allowance
Charlene Young, senior pensions and savings expert at AJ Bell, comments:
“The cost of retirement tax incentives is within touching distance of £60 billion, once the tax collected on pension withdrawals has been deducted. In economic terms, that translates to roughly 2% of the UK’s GDP.
“HMRC’s latest data shows the cost of income tax relief has seen the biggest increase, up over a third in the past five years, or £8.5 billion in cash terms. It’s pulled away from NIC relief which fell during the 2023/24 and 2024/25 years. This can be explained by the NI primary threshold increasing to bring it in line with the income tax personal allowance in July 2022, followed by cuts to employee NI rates in 2023 and 2024.
Source: HMRC, AJ Bell.
“The income tax relief figures include the upfront tax relief on pensions contributions, but also the cost of the tax-free protection of pension wrappers and the value of pension tax-free cash. When it comes to NI relief, the biggest slice goes to employers.
“Income tax relief for pension schemes now tops the cost table for the first time on its own, leapfrogging the cost of private residence relief at £32.9 billion, which ensures any profits on selling your main home escape capital gains tax.
Why tax relief is a vital tool for pension savers
“Pension tax relief means no income tax on your own contributions today, instead you are taxed when you take the money out of your pension in retirement. That’s after another incentive – tax-free cash – which is usually up to 25% of your pension value when you access it. That deferral is a major incentive, since most people will have a lower income, and therefore less of a tax liability, when they’re retired.
“How much pension tax relief you can get depends on your earnings and the amount of tax you pay. Scottish taxpayers also have different bands of tax and different rates to the rest of the UK, which will affect how much you get. In some types of schemes, people paying more than 20% income tax on their earnings need to claim extra relief, so it’s vital you claim what you’re entitled to.
“The government sensibly did not touch pension income tax relief or tax-free cash at the Budget in November, instead choosing to go after the NI exemptions available for firms and employees of salary sacrifice arrangements. But 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.
“It is still within the chancellor’s gift to commit to stability for pension savers. 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.”
Source: AJ Bell analysis of HMRC data.
