Pension tax relief – why the taxman could owe you money

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.

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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.