Fill your boots from the pension money tree (Birmingham Post article 25.01.2024)

A signification proportion of higher-rate taxpayers are leaving thousands of pounds of pension tax relief unclaimed.

They are missing out on ‘free money’ by failing to complete a self-assessment return or contacting HM Revenue & Customs (HMRC) directly.

The relief allows people to get income tax back on their pension contributions, meaning it only costs £80 to pay £100 into a pension for basic-rate taxpayers and £60 to pay in £100 for their higher-rate equivalents.

However, in the case of the latter, those who pay into a private pension or SIPP only get 20% tax relief automatically added on top of their pension payments. They will need to claim the additional 20% through their tax return and will receive it as a rebate or deduction from other tax due. In addition, employees who pay into a relief at source pension scheme will only get 20% tax relief automatically too. It is down to higher-rate taxpayers to chase the remainder.

Those who don’t do a tax return or don’t add pension payments to their return will potentially receive only 20% tax relief on their contributions and, if pumping £10,000 into their private pension annually, could miss out on up to £122,000 over 20 years compared to someone who received a tax rebate and paid it into their pension over the same period.

A poll for Interactive Investor found a third of higher-rate taxpayers were in this category.

Alice Guy, head of pensions and savings at the flat-fee investment service, said: “Pension tax relief is the jewel in the crown of the UK pension system, topping up pension contributions with additional tax relief. But many higher-rate taxpayers are missing out on the full tax benefit of pension tax relief, and it could have a huge knock-on impact on their retirement wealth.

“Many assume they automatically get all the pension tax relief they’re entitled to, but for higher-rate taxpayers, that’s simply not the case. Ultimately, this is free money, and not claiming additional tax relief you’re entitled to means you could lose out on thousands of extra income.

“Claiming back extra tax relief allows you to further boost your long-term wealth, especially if you pay your rebate straight back into your pension.”

This isn’t a new phenomenon either, notes Money Week.

A Freedom of Information request from Pension Bee found a total of £1.3 billion in pension tax relief went by the wayside between 2016/17 and 2020/21.

Speaking to FTAdviser, Andrew Tully, technical services director at Nucleus, emphasised how the issue was “more important than ever before” due to increasing numbers of higher-rate taxpayers, while Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, stressed the “enormous impact” on what a person can end up with in retirement.

It was an area, she added, where advisers “can and do” play an important part in making sure that clients are well informed about their options. “However, for those without an adviser, it’s an area they may know nothing about and it’s something providers and employers could do more to raise awareness of.”

Tax thresholds have been frozen until 2028 meaning many existing taxpayers are being dragged into the higher-rate band, with the Office for Budget Responsibility forecasting there will be 30 million in just such a predicament by 2027-28.

The deadline for self-assessment tax returns is January 31.

However, you can backdate claims – for the previous three tax years as well as the current one – or alternatively call HMRC.

So, rather than gift the Government a windfall, otherwise retained in the Treasury coffers, get on the case now because time is running out fast.