Not claiming tax relief could cost you £122,000 – make sure you’re not missing out

A recent study conducted by interactive investor found that one-third of higher-rate taxpayers are currently missing out on the extra pension tax relief that they’re entitled to.

This could cost a higher-rate taxpayer, who contributes £10,000 a year, up to £122,000 in their pension pot, assuming they achieve 5% growth over a 20-year period.

If you’re unsure about whether you are missing out on potentially thousands in pension contributions from the government, you’re not alone – 15.5% of those surveyed didn’t know whether or not they were claiming back extra tax relief.

Fortunately, claiming your extra tax relief is a relatively simple process, and it can be made much easier with the help of a financial planner.

To learn exactly how pension tax relief works, and how to claim extra tax relief if you are a higher- or additional-rate taxpayer, read on.

The government reimburses Income Tax on pension contributions

When you contribute to your workplace or private pension, the government normally pays you back the basic-rate Income Tax you have already paid in the form of tax relief. For basic-rate taxpayers, a £100 pension contribution only “costs” you £80.

Most pension schemes apply this basic-rate tax relief at source.

If you earn enough to pay higher- and additional-rate Income Tax you can claim additional tax relief.

Under current tax rules, you will normally pay 40% Income Tax on all earnings between £50,271 and £125,140, and 45% on earnings over £125,141. If you fall into the higher or additional tax bands, you are entitled to 40% or 45% pension tax relief respectively.

Unlike basic-rate tax relief, higher- and additional-rate tax relief is not usually paid to you when you contribute to your pension – but more on this later.

Note that there is a limit to the amount you can contribute to your pension in a single tax year without facing an additional tax charge – this is called the “Annual Allowance”.

In 2023/24, it stands at £60,000 or 100% of your earnings, whichever is lower. However, your Annual Allowance may be lower if your income exceeds certain thresholds, or you have already flexibly accessed your pension.

Pension tax relief is not automatically claimed for higher- and additional-rate taxpayers

While tax relief of 20% is normally applied to pension contributions at source, higher- and additional-rate relief is not. That means that if you are a higher- or additional-rate earner, and you have not been claiming additional tax relief, you could have been missing out.

For example, if you earn £80,170 and you put £35,000 into a private pension in that tax year, a basic rate tax relief of 20% will normally be automatically applied to the whole amount.

You can then claim an extra 20% tax relief on £30,000 (the amount you paid higher-rate tax on) through your tax return or by writing to the tax office.

If you don’t complete a tax return, then you can write to HMRC to provide details of any pension contributions during the year.

If you haven’t been claiming all your tax relief, you can make backdated claims

It is possible to make backdated tax relief claims for the past four years if you haven’t been doing so.

If you’ve only been earning in the higher- or additional-rate tax bands for a few years this means it should be easy to claim back all missed tax relief.

This could be a very beneficial thing to do. By not claiming this extra tax relief, not only are you missing out on extra cash from the government, but you could also be missing out on potential compound returns over the years between now and when you access your pension.

Speaking to a financial planner can give you the confidence that you are making the most of the tax relief available to you, and not leaving any money on the table.

Get in touch

If you haven’t been claiming additional- or higher-rate relief, or you’re unsure, we can help you to access all the tax relief that you are entitled to. To discover how we can help, email [email protected] or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.