An important deadline is approaching
Millions of employees could be unnecessarily giving thousands of pounds to HMRC by neglecting to claim tax relief on their pension contributions, according to warnings from a prominent provider. Penfold reveals that vast numbers of higher-rate taxpayers mistakenly believe all pension tax relief is automatically applied – when in fact HMRC will not return the additional amount unless savers proactively claim it.
With the January 31 self-assessment deadline approaching, specialists warn this is a critical time to review pension contributions and ensure no funds are being overlooked. Chris Eastwood, chief executive of Penfold, said confusion surrounding how pension tax relief operates is costing savers substantial amounts.
“We regularly see people paying higher-rate tax who assume all their pension tax relief is handled automatically,” he said.
“In many cases, it isn’t, and the result is money being left on the table that HMRC won’t pay back unless it’s claimed.”
For most personal pensions, providers automatically add basic-rate tax relief at 20%. But anyone paying 40% or 45% income tax is entitled to more – and that extra relief must usually be claimed by the person.
This affects people who:
- Earn above the basic-rate threshold.
- Pay into personal pensions.
- Contribute to workplace schemes using the relief at source system.
- Are not in salary sacrifice or net pay arrangements.
HMRC data reveals the problem is escalating rapidly. Nearly 7.1 million people – almost one in five taxpayers – will be liable for higher-rate income tax in the current tax year, representing a 38.7% increase from 5.1 million just three years ago.
Approximately 1.23 million will be subject to the additional 45% rate. The dramatic rise is primarily attributed to frozen income tax thresholds, which have remained static since April 2021 and are set to stay unchanged until at least 2030/31.
Mr Eastwood explained that a higher-rate taxpayer making a substantial pension contribution could significantly reduce its actual cost – but only if they claim the complete relief.
“For someone paying 40% income tax, a £10,000 pension contribution could cost as little as £6,000 once all tax relief is claimed,” he said.
Failing to claim the additional relief means savers simply pay more tax than required – and their retirement fund takes a hit as a consequence. Workers using salary sacrifice or net pay pension schemes typically receive full tax relief automatically, as contributions are deducted from wages before tax is calculated.
However, many personal pensions and certain workplace schemes operate using relief at source, where only basic-rate relief is applied by default. Mr Eastwood emphasised that grasping how your pension operates is essential.
Should you be uncertain about which system your scheme employs, he stressed it’s crucial to verify this – particularly ahead of the January cut-off. Whilst the 31st January self-assessment deadline doesn’t compel people to make fresh pension contributions, it represents the final date for declaring income and securing tax relief for the preceding tax year.
Mr Eastwood said: “January is an important moment to review contributions made during the tax year and ensure any higher-rate relief is correctly claimed. Claiming pension tax relief isn’t about gaming the system. It’s about making sure people receive the tax benefit Parliament intended – and not paying more tax than they need to.”
How to secure higher-rate pension tax relief
The self-assessment cut-off falls on 31st January. You might need to make a claim if you’re subject to 40% or 45% income tax and your pension operates relief at source.
Should you submit a tax return, pension contributions are recorded in the pensions section. If you don’t typically submit a return, you may still be eligible to claim through HMRC or by contacting them directly. You’ll require details of your contributions and pension provider.
