Millions of workers across the UK risk missing out on significant pension tax relief amounts, potentially running into hundreds or even thousands of pounds. This issue mainly affects higher and additional-rate taxpayers whose pension providers only claim the basic-rate relief on contributions.
Experts warn that, with income tax thresholds frozen and more individuals being pushed into higher tax bands, it is crucial to verify that you are not inadvertently leaving money with HM Revenue and Customs (HMRC). This comes as HMRC seeks to resolve separate complications impacting lower-paid savers enrolled in “net pay” pension schemes. However, financial advisers emphasise that higher earners should also remain vigilant.
Pension tax relief is typically provided in one of two ways:
READ MORE: Man fined after having sex on Ferris wheel at festival
READ MORE: Government Provides Update on Delays in War Pension Scheme Claims
- Net pay arrangement: Pension contributions are deducted from your salary before income tax is calculated, automatically granting tax relief at your marginal rate.
- Relief at source scheme: Contributions are taken from your post-tax pay. The pension provider then claims basic-rate relief (20%) from HMRC and adds it to your pension pot.
While basic-rate taxpayers receive tax relief automatically, higher-rate taxpayers (those paying 40% or more) might need to make an additional claim to obtain the full amount of relief they are entitled to. Without making this claim, higher-rate taxpayers may miss out on a significant portion of tax relief, with sums often amounting to several hundred pounds or more.
Charlene Young, head of technical at AJ Bell, explains, “Many employees assume they are automatically receiving full pension tax relief through their employer or pension provider, but that is not always the case. Higher earners might still need to actively claim the additional relief.”
As an example, someone paying 40% tax contributing £1,000 to a pension may only see basic-rate relief of £200 added automatically under a relief at source scheme. The remaining £200 of relief must be claimed separately from HMRC.
Nest, the UK’s largest workplace pension provider with 13 million members, operates a relief at source scheme, highlighting how widespread the issue could be.
To determine your pension scheme type, check your payslip or consult your employer or pension provider. If contributions are deducted before tax, you are likely under a net pay arrangement; if deducted after tax, relief at source may apply, and additional tax relief claims might be necessary.
Those who complete a Self Assessment tax return can claim pension tax relief through it. If you do not file tax returns, claims can generally be made directly online or in writing to HMRC. Claims can be backdated by up to four years, enabling recovery of unpaid relief from previous tax years.
Ms Young adds, “While the process may seem cumbersome, claiming what you’re owed could result in a rebate worth hundreds or even thousands of pounds.”
The issue gains importance amid fiscal drag, where wage growth pushes more individuals into higher tax brackets due to frozen income tax thresholds, without any change to tax rates. An estimated nine million people are expected to pay higher or additional rates of income tax this year. Newly promoted higher-rate taxpayers should take particular care to ensure they receive their full entitled pension tax relief.
Ms Young cautions, “If you have recently entered the 40% tax band, you might only be receiving 20% tax relief-the basic rate-and should claim the additional 20%. Don’t let the tax threshold freeze lead to paying more tax and missing out on rightful pension relief,” she concluded.