Could You Be Missing Out On Pension Tax Relief?

When you pay into a private pension, the basic rate tax relief (20%) is usually added by the provider. What you may not know, is that there is an additional relief available to higher and additional rate taxpayers that isn’t applied automatically.

Normally, the extra relief needs to be claimed from HMRC, either through a self-assessment return, or by contacting the revenue directly and requesting an adjustment. Consequently, unless the person taking care of your financial affairs is aware of the relief, it is often missed.

Many high earning clients we speak to wrongly assume everything has been taken care of by their pension provider, only to discover further down the line that they’ve missed out.

This is not a criticism of pension companies – they are only allowed to apply the basic rate relief, but HMRC won’t add it either unless prompted. Therefore, it is easy to assume there’s nothing more you can claim if you don’t need to complete a self-assessment return.

Might you be eligible?

If you are a higher or additional rate tax payer, it is important to understand if you may be entitled to the extra pension tax relief.

Start by checking how your contributions are made. Do you pay them personally, which attracts relief at source, or through a salary sacrifice or net pay arrangement?

A salary sacrifice scheme does what it says on the tin. You give up part of your salary and your employer pays it into a pension. Because you never receive the income, you don’t pay tax on it and there would be no additional relief to apply.

Relief at source means your pension contributions are deducted from your net income, after tax has been paid. In this scenario, you make 80% of the contribution and your provider adds 20%.

If you are earning more than £50,270, you may be due higher rate or additional rate tax relief, but you must claim it from HMRC. First, you need to confirm if it has been applied either through a self-assessment, tax code adjustment or refund from the revenue. Generally, the latter only happens after a claim has been made.

Look for ‘relief at source,’ ‘net pay’ or ‘salary sacrifice’ on your pension statements or payslips. Does it show a deduction alongside the tax and National Insurance payments? Next, check your tax code. The normal code is 1257L. If yours is higher, i.e. 2000L, more of your income is being paid tax-free, so it is likely you are receiving some form of extra relief. (The number equates to the pounds you earn before tax is paid.)

If you don’t understand your method of contribution, it is easy to assume everything is being taken care of for you. In reality, you could be missing out on thousands of pounds.

Understanding tax laws

This isn’t complex tax planning – it’s simply a matter of understanding how pension tax relief works. When you’re already paying the highest rates of income tax, it’s important not to leave any money on the table.

Higher and additional rate relief can be back-dated up to four years, so there could be a significant refund waiting for you. To find out more, click here.

A client came to us for a review of his retirement plans. He was paying £500 net a month into his pension (£6,000 a year) and his provider was adding a further £1,500 in basic rate relief. Because he was a 40% tax payer, we discovered he was entitled to another £1,500 a year in additional relief and he was able to backdate his claim the full four years, equating to a refund of £6,000. We suggested he pay this money into his pension, enabling him to attract even more tax relief going forward.

Taking the time to review how your pension contributions are treated can make a meaningful difference to your overall tax efficiency. If you’re unsure where to start or whether your pension relief has been claimed in full, don’t hesitate to contact us for a free initial consultation. We can identify very quickly if it has been missed. Telephone (01246) 298181 or email: enquiries@belmayne-ifa.com