Millions of workers could be missing out on hundreds or even thousands of pounds in pension tax relief without realising it. This issue is particularly significant for higher and additional-rate taxpayers contributing to pension schemes where providers only claim the basic-rate tax relief.
With income tax thresholds frozen, more people are being dragged into higher tax bands, making it vital to check pension tax relief entitlements to avoid leaving money unclaimed with HMRC. This reminder comes as HMRC works to resolve a separate problem affecting lower-paid savers enrolled in “net pay” pension schemes. However, experts at AJ Bell warn that higher earners should not assume they are automatically receiving all the tax relief they deserve.
Depending on the structure of your workplace pension, you may need to actively claim the additional tax relief to which you are entitled. If you fail to do so, this money does not go into your pension but instead remains with the Treasury.
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Charlene Young, head of technical at AJ Bell, commented: “HMRC is rightly reaching out to help lower earners correct the net pay anomaly, ensuring they receive crucial pension tax benefits. But higher earners should be aware that they too risk missing out if they assume all pension tax incentives are applied automatically. Some may be entitled to claim further tax relief, and failure to do so could mean losing thousands.”
There are two main methods of receiving pension tax relief, and the differences are important. Under a “net pay” arrangement, pension contributions are deducted from your salary before income tax is calculated, which usually means you receive tax relief automatically at your highest tax rate.
Conversely, in a “relief at source” scheme, contributions are paid from your net (take-home) pay. The pension provider then claims basic-rate tax relief from HMRC and adds it to your pension pot. For example, a £800 contribution would have £200 added, making a total of £1,000.
However, higher-rate taxpayers (usually those paying 40%) may be entitled to additional relief on top of this amount. Typically, they need to claim an extra £200 back via HMRC themselves. If they do not, they effectively miss out on that additional tax relief.
Ms Young explains: “Auto-enrolment means most employees are saving into a pension automatically, and many assume their pension providers or employers handle all aspects of tax relief. While this is true for many, it does not apply in all cases.”
AJ Bell points out that the issue could affect more people than expected, noting that Nest-the UK’s largest workplace pension provider-uses a relief-at-source model for its 13 million members.
To find out which type of scheme you are in, check your payslip or contact your employer or pension provider. If pension contributions come out of your salary before tax, it is likely a net pay scheme with automatic relief. If taken after tax, it is probably a relief-at-source scheme, meaning higher-rate taxpayers may need to claim extra tax relief.
Those who complete a Self Assessment tax return can include pension contributions there. If you do not usually file a return, you can claim the additional relief directly from HMRC online or by letter. Claims can also be backdated up to four years, allowing some savers to recover money from previous years.
Ms Young adds: “Though claiming this additional tax relief may seem like a bother, it could result in a tax rebate worth hundreds or even thousands of pounds.”
This reminder coincides with the continuing effect of fiscal drag, where wages increase but tax thresholds remain unchanged. As a result, nearly nine million people are expected to pay income tax at higher or additional rates this tax year. It is especially important for those recently moved into the 40% tax bracket to ensure they receive the full relief, not just the basic rate.
She concludes: “Anyone paying 40% tax for the first time should be aware they could be receiving only 20% tax relief – the basic rate – but are entitled to claim an extra 20%. If you have been affected by the tax threshold freeze, you’ll already be paying more income tax, so don’t inadvertently lose further money by failing to claim full pension tax relief.”