£1.4bn of pension tax relief underclaimed by higher earners – how to claim yours ...Middle East

Hundreds of thousands of people could be missing out on as much as £2,195 in free money from the government towards their retirement pots, new data shows.

Around £1.4bn in pension tax relief is going under-claimed by around 800,000 higher earners, according to figures from a freedom of information (FOI) request by consultancy LCP.

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Pension tax relief is where the Government adds a 25 per cent top-up to your pension contributions, so for every £100 you pay in, you get an extra £25. This increases if you are a higher or additional-rate earner.

The reason you get the extra £25 is because you’ve already paid tax on the £100 you put in your pension. Before tax, your £100 would have been £125 – that’s because £125 taxed at 20 per cent is £100. So the government refunds the £25 back into your pension.

Around 6.8 million people paid into a pension using a method called “relief at source” to get tax relief, which is where basic rate tax relief is automatically credited to their pension.

However, people who pay tax at the higher or additional rates can claim extra tax relief through a self-assessment tax return – but the FOI data shows many high earners are failing to do so, meaning they are missing out in retirement.

According to analysis by LCP, higher earners are missing out on an average of £1,756 each, while additional-rate earners are missing out on around £2,195 each.

LCP said that HMRC argued it’s possible to claim tax relief in other ways, such as by writing a letter to HMRC, and so these figures could be overstated.

But LCP said it is more likely that the figures will be an under estimate, because it is using average pension contributions across all taxpayers to calculate the amount under-claimed, when in reality higher-rate taxpayers are more likely to make larger pension contributions than an average earner.

And as more people are being pulled into higher tax brackets, the numbers could continue to stack up.

Steve Webb, partner at pension consultants LCP, said: “With more and more people being dragged into higher rates of income tax, it is increasingly important that they claim all the tax relief to which they are entitled.

“Anyone saving into a personal pension or other ‘relief at source’ scheme can get higher rate relief – but only if they claim it.

“When filling in your tax return, it is vital not to ignore the box for personal pension contributions but to enter the gross amount that went into your pension. This should trigger a tax refund worth an average of over £1,700 for higher rate taxpayers and over £2,000 for additional rate taxpayers.”

How to claim pension tax relief

If you’re a higher or additional-rate taxpayer, you may be able to claim extra tax relief from the government.

Higher-rate earners are those earning between £50,271 and £125,140, and additional-rate earners are those with income higher than £215,140. Higher earners pay 40 per cent tax on their higher-rate earnings, while additional-rate taxpayers pay 45 per cent.

You should be able to claim extra pension tax relief if you contribute to a workplace or personal pension scheme via ‘relief at source’ (where your tax relief is automatically added to your pension).

There are several ways to claim your extra tax relief. The most common way is through a self-assessment tax return. On your self-assessment return, go to the “tax reliefs” section and enter your total pension contributions for the tax year.

Another way to claim is by using HMRC’s online claim tool by visiting www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments.

You’ll need a lot of information to hand, including:

You’ll need to sign in with your Government Gateway account. If you don’t have an account, you’ll need to create one first. As it’s all in one portal, you will be able to save your progress and come back to it.

Once you’ve claimed, HMRC should send the tax relief back to you, or it will reduce your tax bill. You could also get a change to your tax code so you pay less tax in future. Each option refunds you the overpaid tax.

You can typically backdate pension tax relief for up to four tax years, so you can currently go back to 2022/23.

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How much can I get back?

To work out how much tax relief you might be owed, look at how much you paid into your pension for the year and how much you earned.

Say you earned £55,000 and put £5,000 into your pension. Your income above the higher-rate threshold is £4,730. You can claim an extra 20 per cent tax relief (because everyone gets basic rate relief at 20 per cent, and higher rate taxpayers pay 40 per cent).

As 20 per cent of £4,730 is £946, that’s how much extra tax you could claim back for that year.

You can view your pension contributions by logging into your pension account or by asking your pension provider, or by checking your pay slips.

HMRC has been contacted for comment.

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