80% of higher-rate taxpayers have missed out on a significant amount of available pension tax relief between the tax years of 2016/17 and 2018/19, a study reported by PensionBee has found.
An estimated total of £810 million went unclaimed by more than 1.5 million higher- and additional-rate taxpayers in the 2018/19 tax year. This unclaimed tax relief, between the tax years of 2016/17 and 2018/19, totals £2.5 billion.
Tax relief is one of the best benefits of using a pension to save for retirement. It can add a much-needed boost to your pension and incentivise saving for the future. So why did so much go unclaimed, and what should you be aware of in terms of tax relief? Read on to find out more.
Higher- and additional-rate taxpayers must claim their additional relief
The basic rate of pension tax relief is 20%. So, a £100 pension contribution would cost you just £80, with the government adding the remaining £20.
If you have a relief-at-source pension, typically provided by your workplace, the provider will likely add this tax relief automatically, meaning that your contributions receive a boost from the government. However, it is only the basic rate of tax relief that is added automatically.
Higher-rate taxpayers (those earning between £50,270 and £150,000 in the 2021/22 tax year) are eligible for 40% tax relief. Additional-rate taxpayers, earning more than £150,000 (in 2021/22) are eligible for 45% tax relief. However, this added tax relief will not be given to you automatically.
If you are a higher- or additional-rate taxpayer, you will most likely need to complete a self-assessment, even if your pension is handled by your employer, in order to claim your extra 20% or 25% tax relief.
According to research, some 80% of higher-rate and 53% of additional-rate taxpayers may have failed to claim this additional tax relief.
Note that these figures do not include people who claim over the phone or online, or anyone who has received tax relief by making a “salary sacrifice” contribution.
How to claim back the additional tax relief if you’re a higher- or additional-rate taxpayer
If you are a higher- or additional-rate taxpayer, you can claim your pension tax relief through online self-assessment.
In the relevant section of your online tax return, simply state the exact amount of your pension contributions. This should be a gross calculation that includes your contributions and the basic-rate tax relief of 20%.
Alternatively, you can write to your HMRC tax office. This letter should outline exactly how much you have paid in pension contributions, and you will also need to provide personal details so that you can receive the tax relief.
You will need to submit a new letter every time you change your pension contributions or your salary changes.
You’ll receive your tax relief as:
- A rebate at the end of the tax year OR
- A reduction in your tax liability OR
- A change to your tax code.
You can claim back tax relief from the previous four years. You must make your claim within four years of the end of the tax year you are claiming from.
Everyone is entitled to tax relief up to the Annual Allowance
Each tax year, there is a limit on how much you can contribute into your pension and still benefit from tax relief. This is known as the Annual Allowance.
In the 2021/22 tax year, the Annual Allowance stands at £40,000 or 100% of your earnings, whichever is lower. For very high earners, the Annual Allowance tapers to just £4,000.
It’s also worth noting that, since you can access your pension from the age of 55 (rising to 57 in 2028), once you start to draw flexibly from your pension, the Money Purchase Annual Allowance is triggered. This reduces your Annual Allowance from £40,000 to just £4,000.
If you plan to continue paying into your pension, you may want to avoid drawing from it early to maintain the maximum amount of tax relief you can claim.
A financial planner can help identify and manage all your available tax relief
We’re here to help you get the best out of your finances, and to help you achieve your financial goals. That includes making the most of your pension tax relief.
If you’d like to find out more about our services and how we can identify any tax benefits you may be missing out on, please email firstname.lastname@example.org or call 0115 933 8433.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.