Not "Automatic For The People"

As the deadline for the 2022/23 self-assessment tax return approaches, an essential aspect often overlooked by pension savers is the unclaimed pension tax relief.

Every year, a staggering sum of pension tax relief remains unclaimed, amounting to billions of pounds.

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A recent freedom of information request uncovered that a considerable number of higher-rate taxpayers are not fully utilising the tax relief available on their pension contributions, potentially leading to significant long-term losses.

Shockingly, data from 2016/17 to 2020/21 revealed that a total of £1.3 billion in pension tax relief went unclaimed, highlighting the scale of this issue.

Why Does This Happen?

The process of claiming tax relief varies depending on your tax status.

Basic-rate taxpayers generally receive the correct amount of relief automatically added to their pension pots. However, higher-rate and additional-rate taxpayers are entitled to additional relief that is not applied by default.

Those most likely to miss out are those in their employers scheme where there are both employer and employee contributions.

Lets look at an example.

Susan is in her employers pension scheme. The employer pays in 5% and the employee must match this amount.

Lets assume Susan is a higher rate taxpayer with an annual income of £84,000.

Employer contributions are paid into the pension gross of tax. Therefore Susan will see a monthly payment into her pension from her employer (usually denoted ER on the payslip) of £350.

Susan notices however that her contribution, the employee one (usually denoted EE) is only £280, even though hers should be the same as her employer at 5%.

This is because personal pensions and group personal pensions operate as relief at source schemes.

With these, employee contributions are paid net of basic rate tax and the provider adds the tax relief.

We can see therefore Susan is actually paying the full 5%, as her £280 is £350 net of basic rate tax (£350 * 0.8).

However, Susan must proactively claim the difference between her higher tax rate and the basic rate relief from HMRC to avoid losing out on £840 annually.

This is usually done via her Self Assessment however she may be able to get tax relief quicker by contacting HMRC when the contribution is paid and, as she is employed, this may happen by adjusting her PAYE coding.

Simplifying the Complex

To ensure no one leaves their hard-earned money on the table, here are simplified steps to secure your pension tax relief:

Understand Your Scheme

Determine if your pension contributions are made through a 'net pay' arrangement or a 'relief at source' scheme. The former automatically applies tax relief at your highest rate, while the latter requires you to claim additional relief if you're a higher or additional-rate taxpayer.

Claiming Your Relief

If you complete a self-assessment tax return, include your pension contributions to claim the extra relief. If not, you can directly contact HMRC. This can be done retrospectively for up to four years, offering a grace period for those previously unaware.

Consider Salary Sacrifice

A straightforward method to maximise tax efficiency is through salary sacrifice. By exchanging part of your salary for employer pension contributions, you reduce your taxable income and maximise pension funding, sidestepping the need for reclaiming tax relief. However be aware this a contractual change and any other benefits that rely on salary, such as death in service and income protection could also be reduced.

Overlooking pension tax relief can result in a significant financial loss over time.

As the deadline for the self-assessment tax return approaches, it's crucial to review your pension contributions and ensure you're claiming all the tax relief you're entitled to.