Pension 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 relief on your earnings goes into your pension rather than to the government. It’s paid at the highest rate of Income Tax you pay. In England, this means you’d receive:

  • 20% pension tax relief if you’re a basic rate taxpayer
  • 40% pension tax relief if you’re a higher rate taxpayer
  • 45% pension tax relief if you’re an additional rate taxpayer

So, if you want to add £100 to your pension, you’d need to deposit just £80 if you’re a basic rate taxpayer. For higher and additional rate taxpayers, it’d be £60 and £55 respectively. It’s an incentive that can help you reach retirement goals.

All personal pensions and some workplace pensions apply tax relief at source. This means 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 tax relief, you must complete a self-assessment tax return 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’s estimated that up to £830 million in tax relief has been missed.

It’s important to note that the figures don’t include pension savers that have claimed the tax relief over the phone or online. But it’s likely a significant portion of the estimated sum is being missed because savers aren’t claiming all they’re entitled to.

How to claim tax relief if you’re 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 don’t have to do anything. Your full tax relief will be added automatically.

However, if your pension receives tax relief at source, you need to either fill in a self-assessment tax return or, if you don’t fill in a tax return, contact HMRC. The additional 20% or 25% to your pension could make all the difference when you’re reviewing if your pension dreams are within reach.

How much tax relief can you claim?

Tax relief helps your pension grow but there are limits on how much you claim. You should keep these in mind, as exceeding them can lead to an unexpected tax bill and may mean a pension isn’t 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 and still receive tax relief. For most savers, this is either their annual income or £40,000, whichever is lower. However, if you earn 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.
  • The Lifetime Allowance: The current Lifetime Allowance is £1.055 million. This is the overall limit you can accrue in pensions during your life whilst still benefitting from tax relief.

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’re at risk of exceeding the allowances.

Please get in touch if you have questions about your pension. We’re here to help you get the most out of your savings, including claiming all tax relief you’re 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.