According to recent research, higher rate and additional rate taxpayers in the UK leave millions of pounds of pension tax relief unclaimed yearly[1]. This amounts to a staggering total of £1.3 billion over a five-year period. This unclaimed money could be in your pocket instead.

Pension tax relief is a government incentive to encourage individuals to save for retirement. It boosts your pension contributions based on your income level, the amount which is being contributed and the type of pension scheme you have. The two main methods of receiving tax relief are relief at source and net pay.

BOOST YOUR RETIREMENT SAVINGS

Understanding how pension tax relief works is important, and seeking professional financial advice ensures you claim everything you’re entitled to. Depending on your tax bracket, you may be eligible for 20%, 40% or even 45% tax relief on your pension contributions. Taking advantage of this relief can significantly boost your retirement savings.

If you are a higher rate or additional rate taxpayer, reviewing your pension contributions and ensuring you maximise your tax relief benefits is essential. Doing so can secure a more comfortable retirement and make the most of the money that should rightfully be yours. It’s important to note that income rates vary in different parts of the UK, so the specific rules may differ depending on where you live.

TAX BENEFITS UPFRONT

The main reason why £1.3 billion is left unclaimed in tax relief is that higher rate and additional rate taxpayers often need to claim the additional tax relief manually. The process can vary depending on the type of pension plan or the setup of your employer’s pension scheme.

If you’re in a ‘net pay’ arrangement, you’ll automatically receive tax relief because your pension contributions is deducted from your salary before taxes are applied. This means you receive the tax benefits upfront.

UNCLAIMED TAX RELIEF

On the other hand, if you’re in a ‘relief at source’ arrangement, such as a personal pension plan or some workplace pension plans, your pension payment is deducted from your salary after taxes. In this case, your pension provider will add basic rate tax relief (20%) to your payment and claim it back from the government.

However, any higher rate or additional rate relief must be claimed by you directly from the government. There is so much unclaimed tax relief because many higher and additional rate taxpayers are unaware they need to claim the extra 20% or 25% tax relief on top of the basic rate relief.

THERE ARE SEVERAL OPTIONS TO CLAIM BACK TAX RELIEF IF YOU’RE A HIGHER OR ADDITIONAL RATE TAXPAYER. HERE’S WHAT YOU NEED TO KNOW:
  • Determine your pension arrangement: Firstly, finding out what kind of arrangement you’re a part of is important. You don’t need to take any action if you’re in a net pay arrangement. However, if you’re part of a relief at source arrangement, follow the steps below.
  • Complete a self-assessment tax return: To claim extra tax relief, you can complete a self-assessment tax return. This can be done online, and the deadline for online tax returns is typically 31 January each year. Alternatively, you can contact the government directly to claim the tax relief.
  • Be aware of deadlines: If you choose to submit a paper return, the deadline will be earlier, usually 31 October. It’s important to keep track of these deadlines and set reminders to ensure you submit your claim on time.
  • Receive your tax relief: Once you have claimed the tax relief, you will either receive it as a rebate at the end of the year or through an adjustment to your tax code. The specific method of receiving the relief may depend on your individual circumstances.

Additionally, suppose you didn’t use your full pension contribution allowance over the previous three tax years. You can combine this unclaimed tax relief to make a one-off, large pension contribution. To meet the criteria, you must have contributed less than £40,000 to your pension last year (including tax relief), been a member of a pension scheme for the past three years and NRE (non-relevant earnings) would need to be sufficient to cover the contribution.

You can use your unused allowance for up to 3 years using carry forward, to make a larger contribution this year. The annual pension allowance until 5 April 2023 was £40,000 per year. The annual pension allowance increased to £60,000 in July this year following the Spring budget changes.

To discuss any of the issues raised in this article, please contact us. Further information can also be found at gov.uk.

Source data:

[1] Standard Life – Millions unclaimed pension tax relief – published 10/07/23.

This article does not constitute tax or legal advice and should not be relied upon as such.

The tax treatment is dependent on individual circumstances and may be subject to change in future. For guidance, seek professional advice.A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be  affected by the interest rates at the time you take your benefits.

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

The Financial Conduct Authority (FCA) does not regulate tax advice, estate planning, trusts or will writing.

The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice.

Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.

Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

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