Taxpayers could be missing out on almost £830 million in unclaimed pension tax relief each year
Around 81 per cent of higher rate taxpayers eligible to claim pension tax relief through Self-Assessment are failing to do so, missing out on a huge pot of cash.
According to research by Prudential, nearly 60 per cent of higher rate taxpayers fail to claim full income tax relief on their pension contributions.
Only 19 per cent of higher rate taxpayers surveyed knew whether they had claimed full income tax relief and only 22 per cent said they did claim the full income tax relief they were entitled to. Prudential estimate that the ‘lost’ income tax relief could amount to £1,020 every year to a higher rate taxpayer.
People saving for their pensions receive tax top-ups in one of two ways: either via the “net pay” system or via “relief at source”.
Those in “net pay” schemes, which tend to be adopted by trust-based schemes, should receive their full pension tax entitlement automatically, taken from their pre-tax wages.
“Relief at source” is more commonly used by personal pensions and is regulated by City watchdog, the Financial Conduct Authority (FCA). Personal pensions can be set up by an individual but that is not always the case, as many employers use group personal pensions for automatic enrolment.
The relief at source system for personal pensions requires pension providers to claim basic rate tax top-ups on behalf of their customers and put it in their pensions. For example, if a basic rate taxpayer puts £100 into their pension, the provider would claim back £25 from HMRC and put it in the customer’s pension, raising the total contribution to £125.
Higher and additional rate taxpayers receive this 25 per cent tax top up and can then claim an additional 25 per cent and 31 per cent tax top-up via a self-assessment.
Importantly, you do not need to be self-employed to register for self-assessment, however, you should only try to claim tax relief this way if you have earned more than the basic rate tax threshold and contributed to a personal pension.
According to HMRC, a self-assessment return is just one method that people may use to claim pension tax relief. Many taxpayers also call or write to HMRC to claim the relief they are owed. When someone claims relief outside of self-assessment, their tax code is adjusted to give the additional relief.
One of the great benefits of pension saving for higher and additional-rate taxpayers is the ability not only to receive 20 per cent tax relief upfront but claim back an extra 20 per cent or 25 per cent through your tax return.
Higher rate taxpayers, particularly those not in the self-assessment system, should seek advice to review their entitlement to tax relief and where applicable make tax relief claims.
All taxpayers also enjoy an annual tax-free pension allowance of £40,000. Any unused allowance from the previous three years can be carried forward, offering even greater savings to taxpayers. Contributing to a pension in this way is a great way to distribute your annual income to reduce the amount of tax you pay.
For help and advice on pension tax reliefs, please contact our experts at WMT – Chartered Accountants today.