Every year, higher and additional rate taxpayers leave millions of pounds of pension tax relief unclaimed. According to research by Standard Life(1), this could be worth as much as £1.3bn over a 5-year period.
The mechanics of tax relief
Basic rate tax relief is credited automatically, but higher and additional relief must be reclaimed via self-assessment
Pension contribution is, generally speaking, the most tax efficient form of saving and investment. That‘s due to the ‘quadruple whammy’ of:
· Tax relief on contributions at your marginal rate of income tax,
· Tax-free investment returns within the pension,
· The ability to draw up to 25% tax-free(2) post-Minimum Pension Age(the balance is taxed as income),
· The monies also sit outside your estate for inheritance tax purposes.
Disclaimer: Pensions cannot be accessed until so-called Minimum Pension Age (currently 55but due to rise to 57 from 2028). When investing, the value of investments, and any income from them, can go down as well as up, and you may get back less than you invested.
The focus of this blog is on tax relief - point 1 above. The way in which this is claimed depends on whether you’re contributing to a workplace scheme via salary sacrifice, or to a personal pension via a member contribution (i.e. you pay directly out of post-tax income).
In the case of the former(salary sacrifice), contributions are deducted from pay before tax and so tax relief is effectively already granted (as you don’t pay tax on this tranche of income). This should all be done via PAYE, with no need to detail the pension contribution on your tax return.
However, the issue of unclaimed tax relief relates to the second method of contribution, where someone pays into a personal pension out of post-tax income.
This is best explained by way of an example:
Example
· Say you have taxable income of £200,000 and want to make an additional pension contribution of £30,000 gross.
· In practice, you would actually pay £24,000 into a personal pension,
· The pension provider will reclaim basic rate tax relief on your behalf and £6,000 will be automatically credited to your pension,
· However, as an additional rate taxpayer, you’re entitled to an extra 25% tax relief (i.e. your 45% marginal rate less the 20% already granted). In this example, that translates to an additional £7,500,
· In terms of how to claim this, you’d need to include the £30,000 gross contribution on your tax return under the ‘tax reliefs’ section, option 1: ‘payments to registered pension schemes where basic rate tax relief will be claimed by your pension provider (called ‘relief at source’)’ You’d then be entitled to a rebate of £7,500, payable once you’ve submitted your return.
· As a side note, a good option here (subject to affordability) is to recycle that rebate back into your pension, entitling you to additional relief and so on.
Disclaimer: Levels, bases of, and reliefs from taxation may be subject to change, and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate tax advice. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of each investor.
The £1.3bn unclaimed tax relief arises because many higher and additional rate taxpayers aren’t claiming the extra 20% or 25% relief, likely because they don’t know they need to, or maybe because they don’t know how to. This is particularly true for those earning less than £100k who wouldn’t normally be required to submit a self-assessment tax return.
What to do if you have unclaimed tax relief?
Don’t despair, you can reclaim for previous years
The deadline for online tax returns is end-January each year, so you’ve still got a couple of months to claim any tax relief due for the 2022/23 tax year.
Under current rules, you can also claim back any tax relief for the previous four tax years, in which case, some people might be in store for a decent windfall.
(1)‘Millions left unclaimed in pension tax relief – is some of it yours’ [Standard Life, 10 July 2023 – click here for full article]
(2)Subject to a cap of £268,275
(3)Minimum Pension Age is currently 55 but due to rise to57 by the end of 2028
Disclaimer: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and it does not contain all the information which an investor may require in order to make an investment decision. 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. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
