Taxpayers could be losing out on hundreds – or even thousands of pounds without realising it
Millions of workers may be unknowingly missing out on hundreds – and in some cases thousands – of pounds in pension tax relief . The risk is greatest for higher and additional-rate taxpayers paying into schemes where providers only claim the basic-rate element.
With more people being pulled into higher bands due to frozen income tax thresholds, experts say it’s worth checking now to make sure you’re not leaving money with HMRC. The alert comes as HMRC moves to fix a separate issue that has hit lower-paid savers in “net pay” schemes, but AJ Bell says higher earners shouldn’t relax. Depending on how your workplace pension is set up, you might have to actively claim the extra relief you’re entitled to.
If you don’t, the cash doesn’t go into your retirement pot – it stays in the Treasury. Charlene Young, head of technical at AJ Bell, said “HMRC is finally reaching out to lower earners to correct the net pay anomaly and there has, understandably, been a lot of focus on ensuring the lowest paid aren’t missing out on crucial pension tax perks.
“But they are not the only pension savers who risk being short-changed if they mistakenly assume pension tax incentives are taken care of automatically. Higher earners may need to claim tax relief too and could be missing out on thousands if they don’t.”
There are two main ways pension tax relief is delivered, and the difference matters. In a “net pay” arrangement, your pension contribution is taken from your salary before income tax is worked out. That usually means you get tax relief automatically at your marginal rate, with nothing more to do.
In a “relief at source” scheme, contributions are paid from your take-home pay. The provider then claims basic-rate relief from HMRC and adds it to your pension. Typically, paying £800 results in £200 being added, making a £1,000 contribution.
But if you’re a higher-rate taxpayer, that may not be the end of it. Someone taxed at 40% is usually entitled to additional relief on that £1,000 contribution. In many cases, a further £200 has to be claimed back from HMRC – and if it isn’t claimed, you effectively lose out.
Ms Young said: “Most employees will be saving into a pension by default thanks to auto-enrolment, with many people assuming that they’re getting the full tax relief they’re entitled to and that this is all handled by their pension provider, or their employer. While that’s the case for a lot of people, it isn’t true for everyone.”
AJ Bell says the issue could be wider than people realise, noting that Nest – the UK’s biggest workplace pension provider – uses a relief-at-source structure for its 13 million members.
To work out what you’re on, you can check your payslip or ask your employer or pension provider. If pension contributions come out before tax, you’re typically receiving relief automatically through net pay. If they’re taken after tax, it may be relief at source – and higher or additional-rate taxpayers could need to make a separate claim.
If you complete a Self Assessment return, pension contributions can be included there. If you don’t normally submit a tax return, you can usually claim directly from HMRC online or by writing to the tax authority. Claims can also be backdated by up to four years, which could allow some people to recover money from previous tax years.
Ms Young said: “Although it may feel like a faff, claiming what you’re owed could land you a rebate from the taxman worth hundreds, or even thousands of pounds.”
The reminder comes as fiscal drag – where wages rise but tax thresholds stay frozen – pushes more people into higher bands without any change to headline tax rates. Nearly nine million people are expected to pay income tax at higher or additional rates during the current tax year, making it especially important for anyone newly moved into the 40% band to check they’re not only getting basic-rate relief.
Ms Young said: “It’s particularly important for those people paying 40% tax for the first time to take note. That’s because they may only be receiving 20% tax relief – the basic rate – and are entitled to claim an additional 20% on top.”
She added: “If you’ve been a victim to the tax threshold freeze you’ll already be paying a higher income tax bill as a result, so make sure you aren’t unwittingly shooting yourself in the foot, stumbling into another tax trap by failing to claim back the full 40% rate of income tax on your pension contributions.”
