Millions of workers across the UK could be missing out on hundreds, or even thousands, of pounds in pension tax relief. This is particularly relevant for higher and additional-rate taxpayers whose pension schemes only claim the basic-rate tax relief.
As income tax thresholds remain frozen, pushing more people into higher tax brackets, financial experts urge individuals to check their pension tax relief status to ensure they are not leaving money unclaimed with HM Revenue and Customs (HMRC).
HMRC has recently taken steps to rectify problems affecting lower-paid savers participating in “net pay” pension schemes. However, experts from investment platform AJ Bell warn that higher earners should not become complacent. Depending on how a workplace pension is administered, individuals may need to actively claim any additional tax relief to which they are entitled.
Unlike automatically applying, unclaimed tax relief remains with the Treasury instead of being added to a retiree’s pension fund.
Charlene Young, head of technical at AJ Bell, explained: “HMRC is reaching out to lower earners to correct anomalies related to net pay schemes, and understandably, there has been much focus on ensuring that the lowest earners receive the full pension tax benefits they deserve. However, other pension savers may also be short-changed if they incorrectly assume that all pension tax incentives are automatically applied. Higher earners may need to claim additional tax relief and could be missing out on significant sums if they don’t.”
There are two primary methods by which pension tax relief is awarded, and the distinction is crucial. In a “net pay” arrangement, pension contributions are deducted from a salary before income tax is calculated, meaning tax relief is usually applied automatically at the individual’s highest marginal rate.
By contrast, “relief at source” schemes take pension contributions from post-tax income. The pension provider then claims the basic-rate tax relief from HMRC and credits it to the pension pot. Typically, a contribution of £800 results in an additional £200 being added, culminating in a £1,000 total pension contribution.
However, for those paying tax at higher rates-for example, 40%-this basic relief may not be sufficient. Such taxpayers are generally entitled to claim further tax relief (an additional £200 on the £1,000 contribution in the example). If this extra relief is not claimed, it effectively remains unclaimed.
Ms Young added: “Thanks to auto-enrolment, most employees are saving into a pension by default, with many believing that their full tax relief is handled automatically by their pension provider or employer. While this is true for many, it is not the case for everyone.”
AJ Bell highlights that the scope of this issue could be broader than many realise, noting that Nest-the UK’s largest workplace pension provider with 13 million members-uses a relief-at-source structure.
Individuals can determine which arrangement they fall under by checking their payslip or consulting their employer or pension provider. If pension contributions are deducted before tax, this typically indicates a net pay arrangement with automatic relief. Contributions deducted after tax may mean relief at source applies, requiring higher or additional-rate taxpayers to make a separate claim for their full entitlement.
Taxpayers who complete a Self Assessment tax return can include pension contributions there. Those who do not file returns can usually claim additional relief online or by writing directly to HMRC. Importantly, claims can be backdated up to four years, potentially enabling individuals to recover missed tax relief from prior years.
“Though claiming the relief may seem inconvenient,” Ms Young said, “it could result in a tax rebate worth hundreds or even thousands of pounds.”
The reminder arrives as “fiscal drag”-the effect of rising wages coupled with frozen tax thresholds-pushes more people into higher tax bands without changes to the headline rates. Estimates suggest nearly nine million people will pay income tax at higher or additional rates in the current tax year, making it critical for those newly entering the 40% tax bracket to verify they are receiving more than just basic-rate relief.
Ms Young emphasised: “It’s especially important for those paying 40% tax for the first time to take note, as they may only be receiving 20% tax relief by default, yet are entitled to claim the additional 20%.”
She added: “If you’ve been affected by the freezing of tax thresholds and thus face a higher income tax bill, be sure not to compound the issue by missing out on claiming the full 40% relief on your pension contributions.”