Pension tax relief – why the taxman could owe you money

Savers are missing out on millions of pounds of free cash from the government in the form of pension tax relief.

UK taxpayers saved £32.3 billion overall in 2024/25 by claiming pension tax relief, according to the latest data from HMRC, although £1.3 billion worth is still unclaimed, says PensionBee.

Higher and additional-rate taxpayers with certain types of Self Invested Personal Pensions (Sipps) or workplace pensions are at particular risk of losing out.

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Part of the problem is fewer than one in three people (31%) understand that pension tax relief is basically where some of the money you would have paid to the government in tax goes into your pension, according to recent research by Hargreaves Lansdown.

Higher rate taxpayers (47%) were more likely to understand than basic rate taxpayers (35%), in the survey of 2,000 people by Opinium on behalf of Hargreaves Lansdown.

But overall there was widespread confusion, with 8% of people incorrectly thinking tax relief was a means by which the government matched people’s pension contributions, and 7% wrongly believing it enabled pensioners to take income tax-free no matter how much it was.

Helen Morrissey, head of retirement analysis at wealth manager Hargreaves Lansdown, said: "Tax relief is very much the hidden hero of pensions. It is a powerful incentive to save into your pension."

HMRC estimates the total pension tax relief saving will rise from £32.3 billion to £33.5 billion in 2025/26.

How much taxpayers are saving through pension tax relief has surged in recent years – in 2020/21, £25 billion was saved, 29% less than 2024/25.

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).

“It means that a £1,000 pension contribution for a basic-rate taxpayer only costs them £800,” Morrissey said.

“For higher and additional-rate payers, it is even more attractive with the same contribution only costing them £600 and £550 respectively.”

Do I need to claim pension tax relief?

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.

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.

Between 2016 and 2021, £1.3 billion of pension tax relief went unclaimed, according to a Freedom of Information request to HMRC, obtained by online pension service PensionBee in 2023.

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.

Morrissey, at Hargreaves Lansdown, added: “Many people will be gearing up to hand money to the taxman as the deadline for online self-assessment approaches. However, for others it’s time to give their pensions a welcome boost as they reclaim unpaid tax relief on their pension contributions.”

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,” said Rob Morgan, chief analyst at wealth management firm Charles Stanley.

He added: “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 some previous years. 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.

How those in the £100k tax trap can get 60% pension tax relief

People with incomes over £100,000 can claim 60% pension tax relief on the amount up to £125,140, due to the fact the personal allowance is reduced by £1 for every £2 earned above £100,000.

Claiming pension tax relief on earnings in between this bracket, where people are hit by the “60% tax trap”, can also reduce someone’s income to below £100,000, making them eligible for free childcare hours or tax-free childcare.

Research by wealth management group Rathbones suggests tax relief claimed at 60% and then invested back into your pension can significantly boost your retirement pot.

It found someone making a £10,000 contribution to their pension, taken from earnings between £100,000 and £125,140, would get £5,000 in pension tax relief in one tax year.

If this amount was invested into a pension each tax year plus an extra 2% per year in line with inflation, and left to compound, it could be worth £255,358 after 20 years.

Ed Wood, senior financial planner at Rathbones, said: “Earning just above £100,000 puts people in one of the most punitive tax positions in the UK – but it also creates an opportunity. By giving up a small slice of heavily taxed income, individuals can not only stay eligible for important childcare support but also supercharge their retirement savings."