The looming January 31 deadline for HMRC self-assessment is a date firmly etched in the minds of many, but one financial expert has warned that it’s not just about paying what you owe. It’s also an opportunity to ensure you’re claiming back what’s rightfully yours, particularly when it comes to pension tax relief.
Gary Smith, a retirement specialist at wealth management firm Evelyn Partners, emphasised: “Pension tax relief is the outstanding benefit of the UK’s private pension saving system – it’s one of the main reasons advisers encourage most people who can afford to, to save into a pension. So it’s important that savers who take up this opportunity don’t shoot themselves in the foot by neglecting to collect the great benefits on offer.”
Research conducted by PensionBee in 2023 suggested that hundreds of thousands of higher and additional taxpayers each year were forgetting to claim back pension tax relief, amounting to around £250million annually. Interactive Investor further highlighted that as many as a third of higher-rate taxpayers could be missing out on an additional 20% tax relief on their pension contributions every year.
Mr Smith elaborated: “Many savers completing tax returns are so focused on making sure they are not caught out by HMRC for under-reporting taxable income or assets, that they forget to collect pension tax relief they are owed and lose out on a substantial rebate. Others have no other reason to get involved in self-assessment, but they need to remember that they might have to for this purpose – although it is possible to claim back tax relief without having to complete a tax return.
“By not claiming back tax relief that they are entitled to on pension contributions already made, higher and additional rate taxpaying savers could be sacrificing thousands of pounds – at a time when frozen thresholds and allowances mean that millions of taxpayers in recent years have been drawn into paying a higher rate of tax on their income.”
He further explained that anyone paying into either a “relief at source” pension scheme or a personal pension like a SIPP will contribute sums out of net pay, after income tax has been deducted. Basic rate tax relief at 20% will be added automatically by the pension provider – but if you have paid tax on your income at the higher rate of 40% or additional rate of 45% you will then need to claim back the extra 20% or 25% in relief from HMRC.
Mr Smith explained: “It might be that some employees are misled by the term ‘relief at source’, which could be taken as implying that all relief is taken care of at the point of contribution. Rather, it is in ‘net pay’ or salary sacrifice systems that relief at all levels is added automatically.”
He advised workers to get clarity on their pension schemes, saying: “But, in any case, as a first step employees should check what sort of system their workplace scheme uses if they aren’t sure. They can specifically ask their HR people or the pension provider if all their tax relief has been added to their contributions.
“All personal pension savers meanwhile – whether it is a policy with one of the big insurers, a stakeholder pension or a SIPP – can assume they need to take action to claim back higher or additional rate tax relief.”
Mr Smith pointed out the significant sums at stake for higher earners, saying a higher-rate taxpayer paying £50,000 net (£62,500 with gross applied) into a private pension each year could potentially miss out on £12,500 due to the unclaimed pension tax relief, while that sum would be £15,625 for an additional rate taxpayer.
Mr Smith concluded: “He concluded with advice on how to claim this relief: “This tax relief can be claimed on a tax return, but if you are PAYE and have no other reason to register for self-assessment, it is possible to write to or call HMRC with all the details of your contributions and the scheme you are paying into, in order to claim the extra tax relief.”