Why the Rich Get a Bigger Tax Break on Pensions Than Everyone Else

The British government spends about £60 billion a year helping people save money for retirement. This money comes in the form of tax relief, which means workers pay less tax when they put money into a pension. But a growing number of experts say the system is unfair, because wealthier people get far more help than ordinary workers do.

When you earn a higher salary in the UK, you pay a higher rate of income tax. Higher earners pay 40% tax on part of their income, while most workers pay only 20%. The pension tax break follows the same rule, meaning a high earner gets 40p back for every £1 saved, while a regular worker only gets 20p back. Critics say this is like giving a bigger gift to people who already have more money.

Official figures show the total cost of pension tax relief jumped from £48 billion in 2022–23 to £60 billion in 2024–25. That is a rise of one quarter in just two years. About £40 billion of that money goes to higher-rate taxpayers, and many people do not even know this gap exists.

Some politicians think it is time to change the rules. John Healey, a senior government minister, is looking for ways to raise money before the next budget. Supporters of reform say he should make the pension tax break the same percentage for every worker, so lower earners would benefit more and higher earners would receive less.

Pensions were not always this complicated. Decades ago, a pension was simply a safety net for people who were too old or too ill to keep working. Today, many people retire in their early 60s and live for another 25 to 35 years, which means pension savings must last far longer than before.

According to the Office for National Statistics, a 60-year-old in the UK will live to 84 on average and has a one-in-three chance of reaching 90. Wealthier people also tend to live longer than poorer people, meaning they collect more pension money over their lifetimes. Critics say the current system rewards the already-lucky twice — once with a bigger tax break, and again with a longer retirement.

There is also a big difference in the type of pension people receive. Older workers, especially in the public sector, often have a defined benefit pension — sometimes called a final salary pension — which promises a set amount of money each year for life. Younger workers are usually offered a defined contribution pension instead, which rises and falls with the stock market, giving them more risk and less certainty.

This split caused many labour disputes in the 2010s, when unions sometimes negotiated to protect better pensions for older members while newer workers received less generous deals. Over time, those older workers retired with their guaranteed pensions, while younger workers were left behind. Some economists say this pattern has been unfair to an entire generation.

Some experts say keeping experienced workers in their jobs longer would help the economy, because businesses lose knowledge and the country loses tax income when skilled people retire early. Countries with stronger state pensions tend to keep workers employed longer, since the state pension alone is often not enough to live on. But when someone has a large private pension, they have little reason to keep working.

The loudest voices against any change are likely to come from professionals like doctors, lawyers, and business managers who benefit most from the current system. Supporters of reform argue that these workers should consider that a large share of their pension savings comes from other taxpayers — many of whom earn far less. They say a fairer system would still reward saving for retirement, but would not give such a large advantage to those who are already well-off.