- People paying income tax of over 20% need to claim the extra pension tax relief owed to them on personal contributions to certain types of pension scheme
- The full amount of tax relief may not be applied automatically if your employer offers a ‘relief at source’ pension scheme, or you put money into a SIPP or other private pension
- HMRC is making it tougher for people to claim, arguing some past claims have been incorrect
- Everyone will now need to evidence from their pension provider, a requirement previously only made of those paying in over £10,000
AJ Bell senior pension and savings expert, Charlene Young, says:
“Pensions are an extremely tax-efficient way to save for the future and auto-enrolment rules mean most employees will be saving into a pension by default. As a result, many people probably assume that they’re getting the full tax relief they’re entitled to on their pension and that this is all handled by the pension providers or their employer.
“While that’s the case for a lot of people, it isn’t true for everyone. And, although it may feel like a faff, claiming what you’re owed could land you a rebate worth hundreds, or even thousands of pounds, from the taxman.
“Pension tax relief is a complex area where mistakes are possible. HMRC is clamping down by insisting that everyone get hold of evidence for their claim, no matter how small the amount of tax relief they’re requesting.
“This is going to be a pain for some higher and additional rate taxpayers who are used to claiming already and who will now need to do some extra legwork. However, it also provides a useful reminder that everyone should check their pension arrangements and ensure they aren’t missing out on extra money owed to them.”
Pension tax relief
“A pension should act as a tax deferral tool. You pay no income tax on your contributions today and instead are taxed when you take the money out of your pension in retirement, after any tax-free cash (usually up to 25% of your pension value). That deferral acts as an incentive, since most people will have a lower income, and therefore less of a tax liability, when they’re retired.
“For most people with a workplace pension tax relief will be taken care of through a ‘net pay’ arrangement. This means your pension contributions are paid in before any tax is deducted, so you benefit from relief from income tax at whatever your marginal rate is. That might be 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers across most of the UK. Scottish taxpayers face different tax bands and rates for income tax on their earnings.
“But if your employer offers a ‘relief at source’ pension scheme or you’re paying into a private pension yourself (for example a SIPP), then your contributions are paid in from taxed earnings. HMRC then adds 20% tax relief, but you’ll need to claim any tax relief owed to your above the 20% basic rate. It’s worth noting that the UK’s largest workplace pension provider, Nest pensions, operates as a relief at source scheme for its 13 million members.
What’s changed?
“From 1 September HMRC has made it tougher to claim pension tax relief, requiring everyone to evidence their claim for higher amounts. Previously, the requirement to evidence a claim was only placed on those paying in more than £10,000.
“This means that anyone claiming for higher or additional rate tax relief (and the intermediate rate in Scotland) will need to speak to their pension provider for evidence of what they’ve paid into the scheme throughout the year. If you can’t find this when you login to your pension account, or through the provider’s app if they have one, then you may need to contact the pension company and ask them to send it to you.
“You’ll then need to supply this information to HMRC when you make a claim for the tax relief owed to you.”
How to claim
“Claiming pension tax relief may feel like a pain but it could net you thousands of pounds.
“To start with, the best thing to do is find a payslip. That should show your NI number and any contributions made to your pension.
“You then need to find out what type of scheme you’re in. Some schemes, normally known as ‘net pay’ arrangements, will pay pension contribution before any tax is paid. In this case income tax won’t have been deducted prior to the money being paid into a pension, meaning you’re already getting the full rate of relief and don’t need to claim.
“But if your pension contributions are made after tax, normally described as ‘relief at source’ then your company will be making tax deductions and then calculating pension contributions. The pension scheme will automatically claim back 20% basic rate relief, but you must then claim the additional 20% or 25% relief yourself.
“If you can’t tell from the information on your payslip what type of scheme you’re in then contact your employer or the pension provider and ask them to tell you.
“To claim you’ll need to contact HMRC directly and there are a few different ways in which you can do this. If you complete a tax return, you can include the information there and recover any tax relief owed.
“If you don’t usually have to complete a tax return, you can claim the extra relief directly online from HMRC. You can also write to them, although it will take longer to process.
“To claim online visit the government webpage, which you can find through a search engine, and follow the link to claim.
“You’ll need to login to your government gateway account. The online service from HMRC will then take you through a series of steps (see below) to confirm which tax year the claim applies to, as well as details about your employer, your payroll number and the contribution made to your pension. Most of this should be on your payslips or your p60, the end of year summary of your taxes. You’ll then be asked to upload some documents to evidence your claim, like a copy of your payslip or a record of your pension contributions from the scheme provider.
“Once the claim is processed you’ll either get that extra relief through your tax code adjustment, a tax refund, or an adjustment to your tax bill for the year.
Fiscal drag effect
“Frozen tax thresholds and rising wages have dragged millions of people into a higher tax bracket over the last few years.
“It’s particularly important for those people paying 40% tax for the first time to take note. That’s because they may only be receiving 20% tax relief – the basic rate – and are entitled to claim an additional 20% on top.
“The stealth tax has been put in place as a means of raising tax without actually increasing the headline rate of taxation. If you’ve been a victim to the tax threshold freeze you’ll already be paying a higher income tax bill as a result, so make sure you aren’t unwittingly shooting yourself in the foot, stumbling into another tax trap by failing to claim back the full 40% rate of income tax on your pension contributions.”
Number of higher and additional rate taxpayers by tax year:
Source: AJ Bell/HMRC
