Pension savers told to claim ‘outstanding benefit’ worth thousands

Those who are used to annual HMRC self-assessment will need no reminding of the January 31 deadline and the cost of missing it. But when it comes to pension tax relief they need to make sure they are also using their tax returns to their own benefit as well as paying what they owe to HM Revenue & Customs, according to one financial expert.

Many people who never deal directly with HMRC because they receive their salary through PAYE, and other pension savers who generally don’t have to bother with self-assessment, “must be particularly alert not to lose out at this time of year by forgetting to claim money that is rightfully theirs”.

Gary Smith, financial planning partner and retirement specialist at wealth management firm Evelyn Partners, said: “Pension tax relief is the outstanding benefit of the UK’s private pension saving system – it’s one of the main reasons advisers encourage most people who can afford to, to save into a pension. So it’s important that savers who take up this opportunity don’t shoot themselves in the foot by neglecting to collect the great benefits on offer.”

PensionBee research conducted in 2023 suggested that hundreds of thousands of higher and additional taxpayers every year were forgetting to claim back pension tax relief to the tune of about £250million each year. As many as a third of higher-rate taxpayers every year could be missing out on an additional 20% tax relief on their pension contributions, according to Interactive Investor.

Mr Smith continued: “Many savers completing tax returns are so focused on making sure they are not caught out by HMRC for under-reporting taxable income or assets, that they forget to collect pension tax relief they are owed and lose out on a substantial rebate. Others have no other reason to get involved in self-assessment, but they need to remember that they might have to for this purpose – although it is possible to claim back tax relief without having to complete a tax return.

“By not claiming back tax relief that they are entitled to on pension contributions already made, higher and additional rate taxpaying savers could be sacrificing thousands of pounds – at a time when frozen thresholds and allowances mean that millions of taxpayers in recent years have been drawn into paying a higher rate of tax on their income.”

Anyone paying into either a “relief at source” pension scheme or a personal pension like a SIPP will contribute sums out of net pay, after income tax has been deducted. Basic rate tax relief at 20% will be added automatically by the pension provider – but if you have paid tax on your income at the higher rate of 40% or additional rate of 45% you will then need to claim back the extra 20% or 25% in relief from HMRC.

Mr Smith added: “It might be that some employees are misled by the term ‘relief at source’, which could be taken as implying that all relief is taken care of at the point of contribution. Rather, it is in ‘net pay’ or salary sacrifice systems that relief at all levels is added automatically.

“But, in any case, as a first step employees should check what sort of system their workplace scheme uses if they aren’t sure. They can specifically ask their HR people or the pension provider if all their tax relief has been added to their contributions.

“All personal pension savers meanwhile – whether it is a policy with one of the big insurers, a stakeholder pension or a SIPP – can assume they need to take action to claim back higher or additional rate tax relief.”

A higher-rate taxpayer paying £50,000 net (£62,500 with gross applied) into a private pension each year could potentially miss out on £12,500 due to the unclaimed pension tax relief, while that sum would be £15,625 for an additional rate taxpayer.

Mr Smith concluded: “This tax relief can be claimed on a tax return, but if you are PAYE and have no other reason to register for self-assessment, it is possible to write to or call HMRC with all the details of your contributions and the scheme you are paying into, in order to claim the extra tax relief.”

Image Credits and Reference: https://www.lancs.live/news/cost-of-living/pension-savers-told-claim-outstanding-30776434

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