The cost of pensions tax relief to the government increased to £38.6bn in 2016/17, up from £38.5bn the previous year.

The figure represents a stabilisation after some larger jumps in previous years due to upward pressures such as auto-enrolment, the pension freedoms, and increased employer contributions to try to tackle pension deficits on defined benefit schemes. Between 2015 and 2016, the cost of pensions tax relief increase by almost £4bn.

Well over half the cost of tax relief is in respect of contributions made by employers, particularly into final salary pension schemes. However, tax relief on pension contributions made by the self-employed remains pitifully low at £700m, barely half the level in 2007/08.

Aegon pensions director Steven Cameron noted that the latest figures highlight some “interesting and at times worrying trends”. Firstly, he said the amount of tax relief granted by HMRC on pension contributions has increased over the last 10 years by 25 per cent from £30.8bn to £38.6bn. However, the increase in tax receipts on pensions in payment has increased more quickly by over 43 per cent from £9.3bn to £13.5bn.

“Tax paid on pensions in payment is likely to continue to rise as many current pensioners and those retiring in the coming years continue to benefit from generous defined benefit pensions. Auto enrolment is leading to more people being in defined contribution workplace pensions, and while minimum contributions to these are about to increase, they will still typically be far less generous that the defined benefit schemes of the past," he said.

“Most tax relief being granted on pension contributions is on those from the employer rather than the employee. 82 per cent is on employer contributions, showing that employers continue to pay in the vast majority. A significant part of this is likely to be employers paying in additional sums to defined benefit schemes to make up for funding shortfalls."

Also commenting on the figures, Royal London director of policy Steve Webb said: “Successive Chancellors have viewed pension tax relief as a ‘honey pot’, convenient to dip into whenever they are short of money. But pensions should be a long-term business, and six cuts in the last seven years simply undermines confidence in the system.

“It is time that the Chancellor committed to no more changes to tax relief for the rest of this parliament, especially now that the cost of tax relief has stabilised, so that people can plan with confidence. Instead, there needs to be a focus on the self-employed whose level of pension saving remains worryingly low.”

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