05/03/20Pension savers could be missing out on £830 million of unclaimed tax relief
One of the reasons why pensions are an excellent way to save for retirement is the tax relief you benefit from. Yet, figures suggest that pension savers could be missing out on millions of pounds that could boost their pension fund.
What is pension tax relief?
To encourage workers to save for retirement, the government offer tax relief on pension contributions. Some of the money that you would have paid in tax on your earnings goes into your pension rather than to the government. It is paid at up to the highest rate of Income Tax you pay. In England, this means you would receive:
- 20% pension tax relief if you are a basic rate taxpayer (or non-taxpayer if your contributions are made to a pension using ‘relief at source’)
- 40% pension tax relief if you are a higher rate taxpayer (on contributions matched by income taxed at 40%)
- 45% pension tax relief if you are an additional rate taxpayer (on contributions matched by income taxed at 45%)
So, if you want to add £100 to your pension, you would need to deposit just £80 if you are a basic rate taxpayer. For higher and additional rate taxpayers, it would be £60 and £55 respectively (assuming you have at least £100 of income taxed at that rate). It is an incentive that can help you reach retirement goals.
All personal pensions and some workplace pensions apply tax relief at source. This means you pay your contribution net of 20% tax relief and your pension scheme sends a request to HM Revenue and Customs (HMRC) on your behalf, which then pays an additional 20% tax relief into your pension. However, if you qualify for higher or additional rate tax relief, you must complete a self-assessment tax return or contact HMRC separately (higher rate only) to receive the additional sum, leading to millions going unclaimed.
Up to £830 million in unclaimed pension tax relief
A Freedom of Information request to HMRC highlighted the scale of the problem.
In 2017/18, HMRC received 259,000 claims from higher rate taxpayers and 54,000 from additional rate taxpayers. This is far below the 4.2 million higher rate taxpayers and 380,000 additional rate taxpayers that are estimated to be paying into a pension operating on a relief at source basis. As a result, it is estimated that up to £830 million in tax relief has been missed.
It is important to note that the figures do not include pension savers that have claimed the tax relief over the phone or online. However, it is likely a significant portion of the estimated sum is being missed because savers are not claiming all they are entitled to.
How to claim tax relief if you are are a higher or additional rate taxpayer
If you have a workplace pension that means you pay pension contributions via a net pay arrangement (before tax has been taken), you do not have to do anything. Your full tax relief will be given automatically.
However, if your pension receives tax relief at source, you need to either fill in a self-assessment tax return or, if you do not fill in a tax return, contact HMRC (additional rate tax relief can only be claimed via self-assessment). This reclaimed tax rebate could make all the difference when you are reviewing how much to contribute to your pension.
How much tax relief can you claim?
Tax relief helps your pension grow but there are limits on how much you can claim. You should keep these in mind, as exceeding them can lead to an unexpected tax bill and may mean a pension is not the most efficient way to save for retirement.
- The Annual Allowance: As the name suggests, this allowance dictates how much you can pay into a pension in a tax year without suffering a tax charge (which can be equivalent to your tax relief being reclaimed if contributions are personal ones). For most savers, the limit on tax efficient personal contributions is either their annual income or ‘£40,000 less employer contributions and plus any carry forward’, whichever is lower. However, if you have income plus employer pension contributions of more than £150,000 you may be affected by the Tapered Annual Allowance. This can reduce the amount you can tax efficiently pay into a pension to a minimum of £10,000. Unused allowance can be carried forward for up to three years if eligible.
- The Lifetime Allowance: The current Lifetime Allowance is £1.055 million. This is the overall limit you can accrue in pensions during your life without suffering a tax charge.
Managing these allowances in line with your contributions can be difficult, especially when you consider how values may change due to investment performance. Retirement planning can help you understand how pension wealth will change over time and whether you are at risk of exceeding the allowances.
Please get in touch if you have questions about your pension. We are here to help you get the most out of your savings, including claiming all tax relief you are entitled to, to reach retirement goals.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.