Pension tax relief – why the taxman could owe you money
If you haven't yet completed your tax return ahead of the 31 January deadline, don't forget any unclaimed pension tax relief
Savers are failing to claim millions of pounds of free cash from the government every year in the form of pension tax relief. If you are a higher or additional-rate taxpayer with a particular type of SIPP or workplace pension, this could include you.
If you are in a “net pay” pension scheme where pension contributions are made before you are taxed, you will automatically receive any tax relief you are owed without having to claim it.
However, if you are in a “relief at source” pension scheme (where contributions are made after tax is deducted), you may need to take action.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Although your pension provider will automatically claim tax relief on your behalf if you are in a “relief at source” scheme, they do this at the basic-rate level. This means you will only receive 20%, despite the fact that higher and additional-rate taxpayers are entitled to 40% and 45% respectively.
In 2023, online pension service PensionBee published the findings of a series of Freedom of Information requests logged with HMRC. These revealed that £1.3 billion of pension tax relief went unclaimed between 2016 and 2021.
Meanwhile, a flash poll conducted by Interactive Investor in January 2024 showed that one third of higher-rate taxpayers could be missing out on tax relief on their private pension.
If you are eligible for higher or additional-rate pension tax relief and haven’t claimed it yet, you can do so by filing a self-assessment tax return before the deadline on 31 January.
If you have missed out on pension tax relief historically, you can also backdate a claim for the past four years.
What is pension tax relief?
To encourage people to save for retirement, HMRC gives tax relief on pension contributions. This is applied at your marginal rate – 20%, 40% or 45%.
Everyone can get tax relief when they pay into a pension, even children and people who aren’t working, however there are limits on how much you can receive (imposed via the £60,000 annual allowance).
“Pension tax relief is an enormous incentive to save,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
“It means that a £1,000 pension contribution for a basic-rate taxpayer only costs them £800. For higher and additional-rate payers, it is even more attractive with the same contribution only costing them £600 and £550 respectively,” she adds.
Figures from HMRC show that pension tax relief saved UK taxpayers £28.5 billion in total in the 2023/24 tax year.
How to claim pension tax relief
If you are a higher or additional-rate taxpayer, the first thing you should do is check what kind of pension scheme you are paying into.
If your pension contributions are being paid into a net pay scheme, you don’t need to take any action. If you are paying into a “relief at source” scheme, you should file a tax return.
SIPPs and personal pensions generally fall into the “relief at source” category, as well as some workplace pension schemes. If you are unsure, check with your pension provider or employer.
“Many people assume the process of claiming higher or additional-rate pension tax relief is complicated, but in fact, it’s pretty straightforward,” says Rob Morgan, chief analyst at wealth management firm Charles Stanley.
He adds: “You can claim the tax relief on your self-assessment tax return by stating the gross amount of your total pension contributions for the tax year, including the 20% basic-rate relief already added.
“If you use the online service, HMRC calculates how much tax you have overpaid and then offsets any additional tax you owe against it.
“At the end of the process your net tax position for the year is adjusted. If you have overpaid, the balance can be refunded to your bank account as a tax rebate, or you can choose to pay less tax each month in the next financial year through a new tax code.”
You should consider paying the rebate into your pension (rather than keeping it in your bank account) to boost your retirement fund.
Backdated claims for pension tax relief
If you are panicking that you have never benefited from this extra tax relief on pension contributions, the good news is you can claim it for previous years. In fact, you can claim relief dating back four years, either through amending a previous tax return or contacting HMRC directly.
PensionBee has created a Pension Tax Relief Calculator to show savers how much tax relief could be added to their pension pot. If they’re not already receiving the full amount from their pension provider, it shows the portion they could claim back from the government.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Katie has a background in investment writing and is interested in everything to do with personal finance, politics, and investing. She enjoys translating complex topics into easy-to-understand stories to help people make the most of their money.
Katie believes investing shouldn’t be complicated, and that demystifying it can help normal people improve their lives.
Before joining the MoneyWeek team, Katie worked as an investment writer at Invesco, a global asset management firm. She joined the company as a graduate in 2019. While there, she wrote about the global economy, bond markets, alternative investments and UK equities.
Katie loves writing and studied English at the University of Cambridge. Outside of work, she enjoys going to the theatre, reading novels, travelling and trying new restaurants with friends.
- Ruth EmeryContributing editor
-
Chinese stocks slump on first trading day of 2025
Chinese stocks suffered in the new year from their worst first day of trading since 2016, despite a state stimulus package
By Alex Rankine Published
-
Is now a good time to buy UK housebuilders?
Recent share price falls could make UK housebuilder stocks undervalued, though there is a great deal of market uncertainty to contend with
By Dan McEvoy Published
-
Inheritance tax receipts hit £1.2bn
News More people are being hit by inheritance tax amid rising property prices - and 16m are unaware of whether or not their families could be left to pay a bill when they die.
By Katie Binns Last updated
-
Cut taxes? No, reform them instead
Opinion The way the state raises money is far too complicated, says Merryn Somerset Webb. Time for a radical revamp.
By Merryn Somerset Webb Published
-
HMRC launches one week warning for tax credit renewals
News Tax credit customers have until 31 July to submit renewals amid a scam warning from HMRC
By Katie Binns Last updated
-
Will IHT be cut?
News Sunak could make cuts to Inheritance Tax cuts later this year, reports suggest. We explain what this could mean for you.
By Tom Higgins Published
-
Checklist: 10 easy moves to save you money before the end of the 2023/24 tax year
Tips The end of the 2023/24 tax year is fast approaching. We’ve put together an action plan so you can maximise valuable tax breaks and allowances before they disappear at midnight on 5 April
By Ruth Emery Last updated
-
How to keep your dividends safe from the taxman
Advice The number of people expected to pay dividend tax in 2024/25 has doubled since 2021/22. We reveal six ways to keep your dividends safe and beat the tax trap
By Ruth Emery Last updated
-
Can I avoid IHT by stuffing all my money into a pension?
Advice The ditching of the lifetime allowance could enable millions of pension savers to avoid inheritance tax. We explain how.
By Ruth Emery Published
-
How to get a council tax reduction
Tips Council taxes have risen almost across the board, but some people can get a council tax reduction. We explain who can possibly get hundreds off their yearly bill
By Marc Shoffman Last updated