According to research carried out by PensionBee, around 81% of taxpayers eligible to claim higher rate tax relief through their Self-Assessment tax returns are failing to do so.
It is also estimated that around 54% of additional rate taxpayers are also failing to claim the tax back they are owed.
This all amounts to around £800 million per year in unclaimed money that HMRC could end up keeping.
HMRC will not notify you that you are owed this money. It’s up to you to ensure you claim all the higher rate tax relief you are entitled to and you only have 4 years to do it before it’s lost forever.
What is higher rate tax relief
When you make a personal (not employer) contribution to your pension you are entitled to a tax refund of the Income Tax you are deemed to have paid on the monies used to make the pension contribution.
This is the government’s way of incentivising people to save for their own retirement.
There are basically two methods of making a pension contribution and this is where it gets a bit technical.
#1 – The ‘net pay’ method
If your pension scheme operates the net pay method then pension contributions are usually deducted from your gross salary before any tax is paid.
This is the simple way of making pension contributions because it means you get all your tax relief upfront regardless of whether you pay basic, higher or additional rate Income Tax.
You don’t pay tax on the income that goes into your pension because it never goes into your wages. It’s taken out before Income Tax is applied.
Contributing to a pension using this method also has the added benefit of saving you National Insurance payments. Employers save employer National Insurance payments too so some may pass this benefit onto you, topping up your pension even further.
The net pay method may also be called ‘salary sacrifice’ and from my experience is now a very common method used for employer based pension schemes, particularly since auto enrolment was introduced.
If your employer operates the net pay method there is nothing more you need to do.
#2 – The ‘relief at source’ method
If your personal pension provider or employer pension scheme operates the relief at source method then when you make a pension contribution the pension provider will automatically top up your contribution by basic rate tax relief.
So for example, if you contributed a £800 to a pension, the pension provider would claim back the basic rate tax relief (£200) from HMRC and top up your contribution to £1,000.
If you are a basic rate income taxpayer then no more needs to be done, you have your tax relief entitlement.
However, if you are a higher rate or additional rate income taxpayer then you will need to contact HMRC to claim the higher rate tax relief and/or additional rate tax relief element.
So in the example above, for a higher rate income taxpayer, you would be entitled to claim a further £200 from HMRC. For additional rate income taxpayers, you could claim a further £250.
This money is refunded to you and not into your pension.
This is where the big issue lies because it’s payments into pensions using the relief at source method where people are not claiming the higher rate tax relief that they are entitled to.
The claim should usually be done via your Self-Assessment tax return and if you don’t do one then you need to contact HMRC direct and explain what you have been contributing to pensions.
If you are a higher rate or additional rate taxpayer and didn’t realise you needed to claim the extra tax relief then you can contact HMRC and ask them to go back and pay you what you are owed. Unfortunately HMRC will only allow you to go back 4 years. So make sure you assess your position now before any further time is lost.
What to do next regarding your higher rate tax relief
If you feel you might be part of the 81% and are owed some of that £800 million in unclaimed tax relief then you need to assess your position quickly.
- Check your gross pay over the last 4 years. Do you fall into the higher rate or additional rate Income Tax brackets?
- Identify which pensions you have contributed to over the last 4 years. Include employer and personal pensions like Self Invested Personal Pensions (SIPPs).
- Check with your employer and each pension provider which contribution method they use. Net pay or relief at source?
- If relief at source, check the contributions you have made and whether you have included these pension contributions on your Self-Assessment tax return or if you don’t do one that you contacted HMRC.
- If you feel you have unclaimed higher rate tax relief owed to you, contact HMRC immediately. They will usually be pretty helpful.
Going forward, if your employer does not operate the net pay method ask them to consider this. It could make your life easier but also give you an additional top up if your employer was to pass on their National Insurance saving.
You could ask your employer to consider this as part of your overall reward package as it doesn’t cost the employer any more. Something that could be useful in your negotiations particularly if the employer is not willing to give a straight forward salary increase.
If you would like some assistance in understanding your pension position and whether you are likely to be owed any higher rate tax relief then we would be happy to help. Sometimes just a short phone call is all it takes to point you in the right direction. Contact us for a free, no obligation chat.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.