The report from the Pensions Policy Institute (PPI) has revealed that basic rate taxpayers make up 83.4% of total taxpayers but only receive 26% of the pensions tax relief related to Defined Contribution (DC) pension contributions.

A DC pension scheme provides a retirement income that is based on the amount of money paid in and investment growth of this money.

People receive tax relief from the Government when making contributions to a DC pension. In 2018, DC contributions represented just 17.5% (£9.3bn) of the total amount spent on tax relief (£53bn), despite the number of people contributing to workplace pension increasing to 87% from 55% in 2012.

The report has also highlighted that the number of people earning less than £30,000 who now qualify for tax relief has increased from 52% to 62% due to automatic enrolment. However, only 24% of tax relief goes to them.

Similarly, it indicated that more young people are paying into their pension, but the tax system benefits older people. A total of 42% of people who contribute to a DC pension are under 40, but they only receive 27% of the available tax relief. People in their 40s and 50s receive two and half times as much tax relief from the Government.

The report also revealed that men receive the most tax relief with 71% of DC tax relief is granted to men, as they pay 69% of the contributions.

The research is the first of its kind since the 2016 Pensions Review and found tax relief could be distributed more fairly. According to the PPI, changing the current system to a single rate would increase the amount of pensions tax relief for the basic rate taxpayer from 26% to a more equal 42%.

The findings will inform the ABI’s wider policy work on simplifying pensions tax relief. The current pensions tax relief system is too complex. Years of tinkering have made it difficult for savers to plan for the long term. A change to the system is needed so it is simpler, fairer to all earners and encourages saving for retirement.

Yvonne Braun, director of long-term savings and protection at ABI, said: “Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving. However, the distribution of pensions tax relief under the current system exacerbates existing inequalities, particularly between men and women.

“We hope the research will provide food for thought on how to make the system simpler and fairer.”

Tim Pike, head of modelling at the Pension Policy Institute, added: “While automatic enrolment has significantly increased the number of low earners benefitting from tax relief on DC pension contributions, half of the value of this relief goes to people earning £60,000 or more. A change to the system of tax relief on DC pensions could offer an opportunity to address the philosophy of the current system although implementation would present challenges.”