
Over the past five years, an astounding £1.3 billion of pension tax relief has not been claimed in the UK. Higher and additional-rate taxpayers appear to have missed out on substantial amounts, as per certain experts.
This tax is the Government’s method to top up your pension payments and help your pension pot grow. To prevent missing out on more relief in the future, we’ve put together some handy advice for you to ponder.
Getting to grips with pension tax relief
You can receive tax relief on private pension contributions up to the total amount of your yearly earnings. The tax relief might be automatically applied, or you might need to claim it manually. This depends on the pension scheme you’re in and the Income Tax rate that applies to you.
For instance, if you’re a basic-rate taxpayer and your Income Tax is 20 per cent, you’ll get a matching 20 per cent boost on your pension payments. Therefore, a pension contribution of £100 would essentially only cost you £80.
If you’re a higher or additional rate taxpayer, paying 40 per cent or 45 per cent in Income Tax respectively, your pension contributions could attract even more relief. For example, a contribution of £100 would cost a higher-rate taxpayer just £60, while for an additional-rate taxpayer, it would only be £55.
Even if you have no taxable income, you can still get 20 per cent tax relief on your contributions up to your earnings amount. For those with no earnings or earning less than £3,600 a year, tax relief is also available on contributions up to £2,880.
Why has so much not been claimed in the past?
One of the reasons for such high amounts not being claimed is that pension tax relief isn’t always automatically applied, especially for higher and additional rate taxpayers. The type of pension plan you have can affect how the relief is obtained.
If your pension scheme is a ‘net pay’ arrangement, you’ll get tax relief automatically because your pension payment is taken from your pre-tax salary via PAYE. This way, you get your tax benefits upfront.
On the other hand, if you’re on a ‘relief at source’ arrangement, which is common with personal pension plans and some workplace pension plans, your pension payment is taken post-tax.
In this case, your pension provider will add the basic-rate tax relief (20 per cent) to your payment and claim it from the Government. However, you must claim any higher or additional tax relief that’s available to you.
The failure to claim this additional relief is why over a billion pounds remain unclaimed. Many higher and additional rate taxpayers simply don’t know that they need to claim an extra 20 per cent or 25 per cent tax relief on top of the 20 per cent basic-rate tax relief applied automatically, or they don’t know how to claim it.
How can you claim relief back?
First, find out the type of arrangement you’re in. If it’s a net pay arrangement, you don’t need to do anything. But if it’s a relief at source arrangement, you’ll need to follow these steps.
You’ll need to fill out a Self-Assessment tax return to claim your extra tax relief or you can get in touch with the Government. Keep in mind, the deadline for online tax returns is 31 January each year, and for paper returns, it is 31 October.
The tax refund can come as an end-of-year rebate or an adjustment to your tax code. Remember, changes to your pension payments or your salary can change the amount of tax relief you’re eligible for.
If you haven’t claimed before, you can backdate this by up to four tax years. Your tax relief is capped at your annual pension allowance, which is the lower of £60,000 or your total salary for the tax year 2023/24, but only £40,000 for tax years before this date. Going over this limit may result in a tax charge.
If you’re unsure whether the correct rate of relief has been applied to your pension contributions, it’s best to seek advice straight away so that you can claim relief on previous tax years now. Speak to one of our professional accountants by getting in touch.