The Wire: Spring 2022 – The £810 million pension mistake you could be making if you pay higher- or additional-rate tax

(Estimated read time 5 minutes)

The £810 million pension mistake you could be making if you pay higher- or additional-rate tax

If you’re a higher- or additional-rate taxpayer, saving into a pension can be extremely tax-efficient.

On top of the 20% tax relief you will typically receive at source, you can also claim an additional 20% or 25% relief. This means that a £10,000 pension contribution only costs you £6,000 if you pay higher-rate Income Tax, or £5,500 if you pay Income Tax at the additional rate.

Despite the significant tax benefits of pension saving, new research has found that 1 million higher-rate taxpayers are failing to claim the additional relief they are entitled to.

The Telegraph reveals that 8 in 10 higher-rate taxpayers who are eligible to claim relief fail to do so, missing out on a combined £810 million in unclaimed relief every year.

Read on to find out more about the eye-watering tax relief savers are failing to claim, and how to make sure you receive the relief you’re entitled to.

Fewer than 1 in 4 higher- and additional-rate taxpayers claimed their additional relief in 2018/19

Research from an online pension provider, shared by the Telegraph, has revealed the extent to which higher- and additional-rate taxpayers in the UK are failing to claim their full pension tax relief.

As well as the 80% of higher-rate taxpayers not claiming additional relief through their tax return, more than half of all additional-rate taxpayers did also not claim the money they were due in 2018/19.

Just 310,000 of the 1.4 million higher- and additional-rate taxpayers claimed this relief on their personal pensions in the 2018/19 tax year. Note that these figures do not include people who claimed over the phone or online, or anyone who received tax relief by making a “salary sacrifice” contribution.

While many workplace pensions claim all the available tax relief on your behalf, personal pensions only claim relief at 20%. The extra 20% or 25% relief must be claimed through a tax return.

As an example, if you’re a 40% taxpayer and you contributed £6,000 to a personal pension, you would typically receive basic-rate tax relief of £1,500. You would also be reimbursed an additional £1,500, but only if you claim this through your tax return.

How to claim back your additional pension tax relief

If you’re a higher- or additional-rate taxpayer, you can claim your pension tax relief through online self-assessment.

Proceed to the relevant section of your online tax return and state the exact amount of your pension contributions.

It’s important to remember that this should be a gross calculation that includes your contributions and the basic-rate tax relief of 20%. The Telegraph reports that “not doing this is one of the most common mistakes people make”.

You will receive your tax relief as:

  • A rebate at the end of the tax year
  • A change to your tax code
  • A reduction in your tax liability.

Rather than going online, you can also write to your HMRC tax office using the relevant address on your P60 or payslip. You should outline exactly how much you have paid in pension contributions, and you will also need to provide personal details so that you can receive the tax relief.

Remember that you will need to submit a new letter every time you change your pension contributions or your salary changes.

If you haven’t claimed your tax relief recently, you can claim back tax relief from the previous four years. You must make your claim within four years of the end of the tax year you are claiming from.

A brief note about the Tapered Annual Allowance

When considering your level of pension contributions, the amount of tax relief may be affected by the Tapered Annual Allowance if you’re an additional-rate taxpayer.

In the 2021/22 tax year you can contribute 100% of your earnings to your pension tax-efficiently – up to a maximum gross contribution of £40,000. This is your Annual Allowance.

However, if your “threshold income” is over £200,000 in a year and your “adjusted income” is more than £240,000, you may be affected by the taper.

Your adjusted income includes all pension contributions (including any employer contributions) while your threshold income excludes pension contributions.

The taper reduces your Annual Allowance by £1 for every £2 of adjusted income over £240,000. If you earn £312,000 or more, you will have the maximum reduction of £36,000 – leaving you with an Annual Allowance of just £4,000.

The table below shows how the Annual Allowance tapers, based on how much you earn.

If you are affected by the Tapered Annual Allowance, it can be beneficial to work with a financial planner. We can help you to maximise the tax efficiencies that are available and save for your retirement in the most effective way.

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