The total cost of pension tax relief is set to increase to an estimated £59.1bn for the 2025/26 tax year, figures from HMRC have shown.

This would represent an increase of £3.7bn compared to the previous tax year and an increase of £10.9bn over the past five years.

Pension income tax relief was projected to cost £33.5bn in 2025/26, while national insurance contribution (NIC) relief was forecast to reach £25.6bn.

HMRC attributed the recent increases in pension tax relief to several factors, including the aggregate value of pension contributions tending to rise in line with wages, increases to the pension annual allowance and the abolition of the lifetime allowance, and the lowering of the additional rate threshold.

Income tax relief alone now tops the cost chart, taking over from tax relief on selling main homes.

AJ Bell senior pensions and savings expert, Charlene Young, noted that the 2025/26 cost of pension tax relief translated to roughly 2 per cent 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 £8.5bn in cash terms,” she stated.

“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.”

Young added that the government “sensibly” did not touch pension income tax relief of tax-free cash in the November Budget.

However, “many people” had already made decisions based on speculated changes, and there was a 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,” Young continued.

“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.”

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