Yahoo Finance Why you may be missing out on pension money
Few, if any of us would ever willingly leave money they are entitled to on the table and yet we do see this happen when it comes to tax relief on pensions.
Tax relief plays a powerful part in topping up our pension saving with recent data from HMRC showing an estimated £25.4bn of tax relief was paid in 2022-23 alone.
However, not everyone is getting everything they are entitled to, with HMRC data showing that £1.3bn of pension tax relief went unclaimed by higher and additional rate taxpayers in the five years between 2016/17 and 2021/22.
Tax relief is one of the heroes of the pension savings landscape and yet many people don’t know what it is or how it works and so they risk missing out. Pension tax relief is a government top up whereby some of the money you would have paid in tax goes into your pension.
Tax relief is paid at your marginal rate of income tax, so a basic rate taxpayer gets 20%, higher rate 40% and additional rate 45%.
Read more: Are you missing out on thousands of pounds in lost pension income?
This means that a basic rate taxpayer paying £80 into their pension would have it topped up to £100 by the government. Higher and additional rate taxpayers need only pay £60 or £55 to be topped up to £100. In Scotland tax bands vary with higher rate taxpayers paying 41% and top rate 46%.
Why does this happen?
Basic rate tax relief is usually added to pension contributions, so you don’t need to claim this.
However, if you pay income tax at the higher or additional rate then depending on how your pension scheme is set up you may need to put in a claim for the extra tax relief.
Ask your pension provider if your pension is set up as a net pay arrangement or relief at source.
If it is a net pay arrangement, then you won’t need to do anything as your pension contribution is deducted from your salary before income tax is paid and your scheme claims back tax relief at your marginal rate of income tax.
You also don’t need to claim if you are in a salary sacrifice arrangement.
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However, if it is set up as relief at source, as many private pensions, such as SIPPs and some workplace pensions are, then you will need to claim the extra tax relief.
This is because contributions are deducted from your salary after tax. The employer takes 80% of the contribution from the employee’s salary and then reclaims the extra 20% from HMRC. This means if you are entitled to tax relief at a higher rate then you need to reclaim it.
How to claim
You will need to fill in a self-assessment tax return to reclaim your extra tax relief. The deadline for online submission is 31 January.
If you haven’t filled one in before then you will need to get set up with an account which can take time. If you miss the deadline don’t worry — you can backdate claims for four tax years.
You can also call or write to HMRC to reclaim tax relief.
It’s important to remember that you can only claim tax relief for contributions up to the level of the annual allowance which is currently the lower of £60,000 or your annual earnings. If you have previously accessed your pension and taken income other than tax free cash, then this annual allowance drops to £10,000.
Watch: When should I start paying into a pension?
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