Why it’s important to check that you’re claiming the right amount of pension tax relief

You may well be aware of how tax-efficient your pension is when you’re building a fund for retirement.

Not only will any interest or investment returns generated within your pension fund be free from Income Tax and Capital Gains Tax (CGT), but you will also typically receive Income Tax relief on your contributions.

Most people will receive the basic rate of tax relief (20%) automatically on their contributions without having to do anything.

Yet, if you are a higher- or additional-rate taxpayer, you may not be making full use of the available tax relief. That’s because you may be able to claim additional 20% or 25% relief on your contributions.

Many savers are making this mistake, too, with Standard Life reporting that higher- and additional-rate taxpayers failed to claim £1.3 billion in relief over a five-year period.

So, find out how pension tax relief works, why it’s important to check whether you could claim more than you’re currently receiving, and how to do so.

Pension contributions usually automatically attract basic-rate Income Tax relief

Pension tax relief sees the Income Tax you would have paid on your contributions returned to you. In essence, this means that a £100 pension contribution technically only “costs”:

• £80 for basic-rate taxpayers (20% Income Tax)
• £60 for higher-rate taxpayers (40% Income Tax)
• £55 for additional-rate taxpayers (45% Income Tax).

If you’re in a “net pay” arrangement, you’ll make pension contributions before you pay Income Tax. In this case, you’ll typically receive the full amount of relief you’re entitled to.

However, if you make your contributions “at source” – that is, your contributions come from your pay after Income Tax has been deducted – then it works slightly differently.

You’ll typically receive basic-rate relief at source automatically. So, for every £80 you contribute, £100 will go into your pension.

However, higher- and additional-rate relief is not usually applied at source. Instead, you have to claim this extra relief.

That means, if you pay Income Tax in one of these brackets, it could mean you’re missing out on a further 20% or 25% tax relief.

Complete a self-assessment return or contact HMRC to claim your relief

To claim higher- and additional-rate tax relief, you can fill out a self-assessment tax return. Alternatively, you can write to HMRC directly.

The relief may then be applied in the form of a rebate at the end of the year for the amount of tax relief claimed. Or, you might see a change to your tax code that increases how much of your income is subject to basic-rate tax, ultimately seeing you pay an amount of tax that takes your pension contributions into account.

Unlike basic-rate tax relief, this won’t be automatically paid into your pension pot. Of course, you could choose to do this with a rebate if you want to.

You can also backdate your claims for the previous four tax years. So, if you know you made contributions that would fall into the higher- and additional-rate brackets in the last four years, you may be able to claim this relief, too.

Claiming everything you’re entitled to can help boost your retirement pot – but seek advice first

With £1.3 billion of unclaimed tax relief in just five years, checking that you claim everything you’re entitled to could make a significant difference to your retirement pot.

In fact, figures published by FTAdviser go to show just how powerful this could be, suggesting that missing tax relief could ultimately cost a person £122,000 in pension wealth. The data also shows how a higher-rate taxpayer contributing £5,000 a year to their pension could miss out on £1,250 of tax relief, rising to £2,500 if they contribute £10,000 a year.

So, claiming all your tax relief could provide your retirement fund with a valuable boost.

However, there are a couple of rules to be aware of before you try to claim any more tax relief.

Firstly, it’s important to bear in mind that you can only claim higher- or additional-rate relief on contributions that fall into the relevant tax band.

For example, imagine that you earn £60,270 a year, making you a higher-rate taxpayer. This tax band starts from £50,271, meaning only £10,000 of your income falls into it. As a result, if you made a £15,000 pension contribution, £10,000 would be eligible for higher-rate relief, with the final £5,000 only attracting the basic rate as it comes from income in the lower band.

Furthermore, there is a limit on how much you can contribute to your pension in a single tax year without facing an additional tax charge. Standing at the lower of £60,000 or 100% of your earnings in 2023/24, this is called your “Annual Allowance”, and counts for all contributions to your fund, including tax relief and any employer contributions.

Your Annual Allowance may also be reduced if your income exceeds certain thresholds, or you have already flexibly accessed your pension.

As these rules can be quite complicated, it may be sensible to speak to a professional and take advice before you claim any tax relief.

Get in touch

Want to make the most of your pension contributions? Speak to us at Britannic Place.

Email info@britannicplace.co.uk or call 01905 419890 to find out more today.

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.