Higher earners who need to claim the extra tax relief owed to them on personal pension contributions now have to follow new rules, after a crackdown by HMRC.
From 1 September HMRC has made it tougher to claim pension tax relief for those who pay higher and additional rate income tax.
Under the new rules, everyone must provide evidence for their claim for higher amounts of pension tax relief. Previously, the requirement to evidence a claim was only placed on those paying in more than £10,000 over the course of a year.
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Charlene Young, senior pension and savings expert at AJ Bell, said: “This means that anyone claiming for higher or additional rate tax relief (and the intermediate rate in Scotland) will need to speak to their pension provider for evidence of what they’ve paid into the scheme throughout the year.
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“If you can’t find this when you login to your pension account, or through the provider’s app if they have one, then you may need to contact the pension company and ask them to send it to you.
“You’ll then need to supply this information to HMRC when you make a claim for the tax relief owed to you,” she said.
Why is HMRC changing the pension tax relief rules?
With the state of the public finances, it is unsurprising that HMRC are looking at areas of the tax system where the tax gap can be closed and revenues boosted, even ahead of the Budget.
Gary Smith, financial planning partner and retirement at wealth management firm Evelyn Partners, said: “I can only presume that some type of internal audit has been undertaken within HMRC that has highlighted a potential issue, as some of those paying in lump sums could have been doing so with minimal checks of their calculations.”
The change is going to be a pain for some higher and additional rate taxpayers who are used to claiming already and who will now need to do some extra legwork, said Young,
However, it also provides a useful reminder that everyone should check their pension arrangements and ensure they aren’t missing out on extra money owed to them.
Many people probably assume that they’re getting the full tax relief they’re entitled to on their pension and that this is all handled by the pension providers or their employer.
But the full amount of tax relief may not be applied automatically if your employer offers a ‘relief at source’ pension scheme, or you put money into a self-invested personal pension (Sipp, also known as a pot for life pension) or other private pension.
“Although it may feel like a faff, claiming what you’re owed could land you a rebate worth hundreds, or even thousands of pounds, from the taxman,” said Young.
As much as £1 billion higher and additional rate pension tax relief is estimated to have gone unclaimed each as thousands of savers either forget or don’t realise they are entitled to it.
How does pension tax relief work?
For most people with a workplace pension tax relief will be taken care of through a ‘net pay’ arrangement. This means your pension contributions are paid before tax is deducted, so you benefit from relief from income tax at whatever your marginal rate is.
That might be 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers across most of the UK. Scottish taxpayers face different tax bands and rates for income tax on their earnings.
“But if your employer offers a ‘relief at source’ pension scheme or you’re paying into a private pension yourself (for example a Sipp), then your contributions are paid in from taxed earnings. HMRC then adds 20% tax relief, but you’ll need to claim any tax relief owed to you above the 20% basic rate,” said Young.
The UK’s largest workplace pension provider, Nest pensions, for example, operates as a relief at source scheme for its 13 million members.
Do I need to claim pension tax relief?
If you’re not familiar with how to claim pension tax relief, first find a payslip. That should show your NI number and any contributions made to your pension. You then need to find out what type of scheme you’re in.
‘Net pay’ schemes will pay pension contributions before any tax is paid, meaning you’re already getting the full rate of pension tax relief and don’t need to claim.
But with ‘relief at source’ schemes your company will be making tax deductions and then calculating pension contributions. The pension scheme will automatically claim back 20% basic rate relief, but you must then claim the extra 20% (for higher rate taxpayers) or 25% (for additional rate taxpayers) relief yourself.
“If you can’t tell from the information on your payslip what type of scheme you’re in then contact your employer or the pension provider and ask them to tell you,” said Young.
How to claim pension tax relief
To claim you’ll need to contact HMRC directly and there are a few different ways you can do this. If you complete a tax return, you can include the information there and recover any tax relief owed.
If you don’t usually have to complete a self-assessment tax return, you can claim the extra relief directly online from HMRC by visiting the government webpage, and follow the link to claim. You’ll need to login to your government gateway account, confirm which tax year the claim applies to, provide details about your employer, your payroll number and the contribution made to your pension.
Most of this should be on your payslips or your p60, the end of year summary of your taxes. You’ll then be asked to upload some documents to evidence your claim, like a copy of your payslip or a record of your pension contributions from the scheme provider.
“Once the claim is processed you’ll either get that extra relief through your tax code adjustment, a tax refund, or an adjustment to your tax bill for the year,” said Young.
You can also write to them, although it will take longer to process.
Who will be affected?
“The change is most likely to impact those who don’t currently need to submit a self-assessment tax return and who claim directly to HMRC for their extra pension tax relief," Smith, Evelyn Partners, said.
“While the phone option has been taken off the table, I can’t see this being a great hardship as the options to apply directly by letter or – better still for those comfortable with digital services – online remain.”
So those who do not have to register for self-assessment for any other reason still don’t have to complete a tax return.
In applying directly to HMRC for pension tax relief it can be possible to request a lump sum payment of the owed relief rather than having the following year’s tax code adjusted, Smith added.
Jon Greer, head of retirement policy at Quilter, said: “To ensure you remain compliant with HMRC requirements and avoid any potential issues, it is important to take a proactive and informed approach. It is also advisable to review your PAYE coding notices regularly to ensure that any relief has been applied correctly.
“If you are unsure whether you need to make a claim or how to proceed, seek professional advice to clarify your position. As HMRC continues to tighten its processes, accurate record-keeping and early engagement will be essential to ensure you receive the relief you are entitled to.”
