As the 31 January tax deadline approaches, have you factored in pension tax relief? It’s been reported that millions of pounds of higher rate tax relief isn’t being claimed through self-assessment tax returns. In this article, we explain how you can check whether you are missing out on this form of tax relief.
What is pension tax relief?
Each year, UK taxpayers leave substantial amounts of pension tax relief unclaimed, potentially missing out on significant boosts to their retirement savings.
Government data shows that over a 5-year period, an estimated £1.3 billion in pension tax relief goes unclaimed. This oversight means that many higher rate and additional rate taxpayers are missing out on funds that are rightfully theirs.
Pension contributions are made from your earnings before tax is deducted, meaning the government effectively contributes to your pension by providing tax relief. For basic-rate taxpayers, this form of tax relief is typically applied automatically at 20%. However, higher-rate (40%) and additional-rate (45%) taxpayers need to claim the additional relief through their self-assessment tax returns.
Below is an example of how this works:
If you’re a higher-rate taxpayer contributing £8,000 into your pension, the government adds the basic-rate relief of £2,000, equating to a total contribution of £10,000. However, you’re entitled to an additional 20% relief on the gross amount (£10,000 x 20% = £2,000). By claiming this through your tax return, you can effectively reduce your tax bill by £2,000.
If you are a higher rate or additional rate taxpayer, then it is up to you to claim this tax relief.
You can only claim back tax relief for the past four years. The amount you receive will depend on your annual pension allowance, pension payments, and any salary changes. Tax relief is usually available through most personal, stakeholder and workplace pensions.
How to claim higher rate tax relief on pension contributions
If you are a higher rate taxpayer, we have shared some steps below to help you claim your entitlement:
- Determine your tax status – Check whether you’re a higher-rate or additional-rate taxpayer. This classification will affect the amount of pension tax relief you can claim.
- Check your pension contributions – Review your pension statements to confirm the contributions you have made, as well as any tax relief already applied.
- Complete a self-assessment tax return – You’ll need to file a self-assessment tax return to claim the extra relief. In your tax return, declare your gross pension contributions (the total amount, including the basic-rate relief).
- Adjust your tax code – Alternatively, you can contact HMRC to adjust your tax code, ensuring the additional relief is applied through your PAYE income.
The deadline for online self-assessment tax returns is 31 January. It’s important not to miss this deadline, as you could incur penalties and interest charges. Also, it’s worth remembering that delaying your claim would mean postponing the boost to your pension savings. The tax will be paid to you either as a rebate or as an adjustment to your tax code.
Pension Advice, West Bridgford
Navigating pension tax relief can seem complicated, especially for higher earners with multiple income sources. Our financial planners can make sure that you’re maximising any entitlements, as well as planning efficiently for your retirement.
Don’t overlook unclaimed pension tax relief. With the tax deadline looming, now is the perfect time to review your pension contributions and ensure you’re receiving the full benefits available to you.
For advice on pension tax relief, get in touch to speak to our financial planning team.
Sources:
https://moneyweek.com/personal-finance/605732/high-earners-missing-pensions-tax-relief https://www.standardlife.co.uk/articles/article-page/millions-unclaimed-pension-tax-relief
https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief
