Are you one of the many savers missing out on millions of pounds of unclaimed pension tax relief?

15 Aug 2023

In the last five years, an incredible £1.3 billion of pension tax relief has gone unclaimed in the UK – with higher and additional-rate taxpayers losing out on incredible sums according to some experts.

This tax is the Government’s mechanism to enhance your pension payments and help you boost your pension pot.

To avoid missing out on further relief in the future, we have prepared some useful guidance for you to consider.

Understanding pension tax relief

Tax relief on private pension contributions can be obtained up to the full value of your yearly earnings.

The tax relief could be automatically applied, or you may need to claim it manually. This varies based on the pension scheme you are enrolled in and the Income Tax rate applicable to you.

For example, as a basic-rate taxpayer, if your Income Tax stands at 20 per cent, you will receive an equivalent 20 per cent increase on your pension payments. Hence, a £100 pension contribution would essentially cost you only £80.

If you are a higher or additional rate taxpayer, paying 40 per cent or 45 per cent in Income Tax respectively, your pension contributions could be subject to even more relief.

For example, a £100 contribution would cost a higher-rate taxpayer just £60, and for an additional-rate taxpayer, the cost would be £55.

Even if you do not have taxable income, you can still receive 20 per cent tax relief on your contributions up to your earnings amount.

For those with no earnings or earning less than £3,600 annually, tax relief is also available on contributions up to £2,880.

Why has so much gone unclaimed in the past?

The reason that so much is not claimed is due, in part, to the fact that pension tax relief is not always automatically applied, particularly for higher and additional rate taxpayers.

This is because the type of pension plan you have can alter the way in which the relief is obtained.

If your pension scheme is a ‘net pay’ arrangement, you will receive the tax relief automatically as your pension payment is deducted from your salary pre-tax via PAYE. So, you receive your tax benefits upfront.

In contrast, if you are on a ‘relief at source’ arrangement, typical of personal pension plans, and some workplace pension plans, your pension payment is deducted post-tax.

In this scenario, your pension provider will add the basic-rate tax relief (20 per cent) to your payment and claim it from the Government. However, you must claim any higher or additional tax relief available to you.

This failure to claim the additional relief is the reason behind the over a billion pounds lying unclaimed.

Many higher and additional rate taxpayers are simply unaware that they need to claim an additional 20 per cent or 25 per cent tax relief atop the 20 per cent basic-rate tax relief applied automatically or they do not know how to claim it.

How can you claim relief back?

First, determine the type of arrangement you are in. If it is a net pay arrangement, you need not do anything.

However, if it is a relief at source arrangement, follow these steps.

You will need to fill out a Self-Assessment tax return to claim your extra tax relief or alternatively, contact the Government. Remember, the deadline for online tax returns is 31 January each year, and for paper returns it is 31 October.

The tax refund can be in the form of an end-of-year rebate or an adjustment to your tax code.

Please note, that changes to your pension payments or your salary can alter the tax relief amount you are eligible for.

If you have not claimed previously, then this can be backdated by up to four tax years. Your tax relief is capped at your annual pension allowance, which is the lower of £60,000 or your total salary for the tax year 2023/24, but only £40,000 for tax years prior to this date. Exceeding this limit may result in a tax charge.

If you are unsure whether the correct rate of relief has been applied to your pension contributions it is best to see advice immediately so that you can claim relief on previous tax years now.