There was lots of talk before the Autumn Budget that higher rate tax relief on pensions would be abolished.
But, for now, pensions tax relief is safe.
So, just what does this mean to you?
When you contribute to a pension, some of the money that would have gone to the government as tax gets added to your pension pot instead. This is called tax relief.
If you’re a basic rate taxpayer the basic rate of tax is 20%. So for every £80 you contribute to your pension, the government will add £20 to your pension pot.
But if you’re a higher rate taxpayer, paying 40% tax on your earnings over £45,001, then you can get an additional £20 to add to your pension pot. This means that a £100 pension payment will only have cost you £60.
Following a recent conversation with one of my clients, though, I realised that lots of people may be failing to claim their higher rate tax relief, simply because they don’t know that this cashback system even exists!
Are you missing out on unclaimed money?
While celebrating the success with a client of her new job and impressive payrise, I suggested she ask some questions of her existing pension provider, and the pension provider at her new job, to explore her options.
During our discussion, I asked whether she was claiming higher rate tax relief on her pension contributions. She wasn’t aware that this was something she needed to do. She didn’t know she could claim, or that it was up to her to claim. Nor that by not claiming she could have been missing out on thousands of pounds.
She was earning £85,000 and paying 10% of this into her work pension. That’s £8,500 a year in pension contributions. With 20% of this automatically claimed by her pension provider as basic rate tax relief, that means it only costs her £6,800 to get £8,500 invested (£1,700 more than she had to pay out of her paycheck).
But this still leaves an additional £1,700 that she was failing to claim each year as a higher rate tax payer.
Research by Prudential in 2015 found that of higher rate taxpayers who contribute to a pension, 23% are unsure whether they reclaim the full tax relief on their pension contributions that they are entitled to.
So, how do you know if this is an issue that affects you or someone you know?
How do I know if I’m affected?
- Are you a higher rate taxpayer? That is currently (tax year 2022-23) anyone earning more than £50,271pa. You can find out more about income tax rates here.
- Are you a member of a ‘relief at source’ pension scheme? Here, your employer takes your pension contribution from your take home pay – this is after income tax has been deducted. Your pension provider then claims basic rate tax relief - 20% - from HMRC. HMRC sends this to your pension provider who adds this to your pension pot. But only 20% tax, not 40% if you're a higher rate tax payer or 45% if your earnings are above £150,000 and you're an additonal rate taxpayer.
As a 40% or 45% taxpayer, it’s then up to you to claim further tax relief (at your highest rate of tax less the basic rate of tax already claimed on your behalf) from HMRC.
‘Relief at source’ pension schemes are most likely if you’re a member of an individual or group personal pension, self-invested personal pension or stakeholder pension scheme.
If you’re unsure if you’re in a ‘relief at source’ pension scheme, it’s best to contact your pension scheme administrator.
How do you claim this extra tax relief?
Do note, the higher rate taxpayer pension relief you’re due won’t be added to your pension pot. You’ll receive the relief in one of three ways:
- Your tax code will be adjusted. (Your tax code is used by your employer or pension provider to work out how much income tax to take from your pay or pension.)
- A tax rebate (refund).
- A reduction in the tax you already owe to HMRC.
How long can you claim back for?
You can claim back up to four years after the end of the tax year your claim relates to.
So, for example, suppose you’ve just discovered you could have been claiming pension tax relief but haven’t done so. We’re currently in the 2022/2023 tax year, which ends 5 April 2023. This means, you could claim as far back as the 2018/2019 tax year which ended 5 April 2019.
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