Don’t leave money on the table: Over £1 billion in pension tax relief goes unclaimed

When sitting down to complete your annual self-assessment tax return, it’s easy to think of the words of comedian Chris Rock: “You don’t pay taxes – they take taxes.”

If you’re a higher- or additional-rate taxpayer, there is one easy way to avoid HMRC “taking” quite as much tax from you. That’s to ensure you claim the tax relief that you’re entitled to on your pension contributions.

However, despite the significant financial benefits of claiming 40% or 45% tax relief, new research from Pensions Age has revealed that over 800,000 higher-rate taxpayers and around 19,000 additional rate taxpayers are failing to claim their pension tax relief through their self-assessment tax return.

The costs of this mistake could end up being significant over time. So, read on to find out more about this new research, how pension tax relief works for higher earners, and why it’s so important for you to claim the relief you’re entitled to.

How pension tax relief works for higher- and additional-rate taxpayers

If you’re a basic-rate taxpayer and you’re employed, your tax relief is likely claimed automatically on your behalf.

Most basic-rate taxpayers benefit from “relief at source”, which requires pension providers to claim basic-rate tax relief of 20% on behalf of their customers and put it in their pensions.

If you’re a higher- or additional-rate taxpayer, you have to claim the additional 20% or 25% relief from HMRC. You will normally do this through your annual self-assessment – even if you’re employed.

Claiming this additional tax relief is hugely beneficial. As a higher-rate taxpayer, it means that every £1,000 contribution to your pension only costs you £600, with the rest coming in the form of tax relief.

Make sure that you state the exact amount of your pension contributions when you file your self-assessment return each year. This should be a gross calculation that includes your contributions and the basic-rate tax relief of 20%.

Your tax relief will come as one of the following:

• A change to your tax code
• A rebate at the end of the year
• A reduction in your tax liability.

As an alternative to self-assessment, you can write to your tax office outlining the pension contributions you have paid. You will have to submit a new letter every time you change your pension contributions.

Thousands of taxpayers failing to claim their tax relief

Despite the substantial financial benefits of claiming tax relief, the new research published by Pensions Age revealed that many thousands of people are not claiming their additional relief. Their research indicated that more than £1bn of pension tax relief may be left unclaimed each year by higher earners contributing to pensions operating under the relief-at-source (RAS) system.

During the 2023/24 tax year, based on broader taxpayer information, it is estimated that around 1.1 million higher-rate taxpayers and 170,000 additional-rate taxpayers were eligible to claim further pension tax relief. However, HMRC figures showed that only 316,000 higher-rate taxpayers and 151,000 additional-rate taxpayers submitted claims. That means over 800,000 higher-rate taxpayers and 19,000 additional-rate taxpayers may not be making use of the pension tax relief available to them.

In total, the value of potentially unclaimed pension tax relief was estimated to be around £1.42bn among higher-rate taxpayers, alongside a further £40m for additional-rate taxpayers.

Although HMRC pointed out that some taxpayers may receive the relief through other methods, such as adjustments to their tax code rather than through self-assessment, the data still points to a continuing problem, with many higher earners potentially missing out on the full pension tax relief they are eligible for.

How much it might cost you if you don’t claim your additional relief

Here’s an example to showcase just how much you could be missing out on if you don’t claim the additional pension tax relief you’re entitled to.

You earn £100,000 a year and make a gross £20,000 contribution to your pension. The provider collects basic-rate tax relief at source, adding £4,000 to your pension pot. You could then claim an additional £4,000 in tax relief through your self-assessment tax return.

In simple terms, if you don’t claim your tax relief in this example, it costs you £4,000.

However, it’s not just the £4,000 you’d potentially miss out on. If that money was invested for 20 years, and achieved an annual return of 4%, it would be worth £8,764 at the end of the 20 years.

If you failed to claim the same £4,000 tax relief every year for 20 years (assuming an annual return of 4%), your pension pot would be almost £120,000 smaller when you came to retire.

(Figures using calculator.net)

Earn over £200,000? Don’t forget the Tapered Annual Allowance

If you pay additional-rate tax, the amount of tax relief you can receive may be affected by the Tapered Annual Allowance.

In the current tax year, the tax relief on your pension contributions is up to 100% of your earnings or £60,000 – whichever is lower. Therefore, as an additional rate tax payer, the Annual Allowance restricts the tax-efficient contributions you can make to your pension to £60,000. This was increased from £40,000 in April 2023.

However, if your “threshold income” is over £200,000 in a year and your “adjusted income” (threshold income plus all pension contributions) is more than £260,000, you may be affected by the taper.

Under the taper, your Annual Allowance is reduced by £1 for every £2 of adjusted income you earn above £260,000. So, if your adjusted income reaches £360,000 or more, the full taper will apply and leave you with a minimum Annual Allowance of £10,000.

If you earn more than £200,000, you could well be affected by the Tapered Annual Allowance. So, it can be beneficial to work with a financial planner who can establish the most tax-efficient ways to plan for your retirement.

Get in touch

If you’re concerned that your pension contributions are not as tax-efficient as they could be, or you think you are missing out on valuable tax relief, please get in touch. Email hello@firstwealth.co.uk or call 020 7467 2700.

If necessary, we can also introduce you to a tax adviser who can help you save both tax and time.

Sources

https://www.pensionsage.com/pa/Over-1bn-of-pension-tax-relief-underclaimed-by-higher-earners.php

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