Every year higher and top-rate taxpayers miss out on millions of pounds of unclaimed “tax relief” – a government top up – on their pension savings.
Personal pension companies automatically claim relief at the basic, 20pc, rate but it is up to individual savers to claim back the additional 20pc, for higher-rate payers, or 25pc for additional-rate payers.
The boost given to anyone earning more than the higher-rate threshold of £45,000 is highly valuable. While it costs a basic-rate payer £80 to make a £100 pension contribution, a higher-rate payer only has to pay £60 to make the same saving.
The extra tax rebate can only be claimed for a limited period.
But HM Revenue & Customers operates a little-known rule that allows the past four tax years to be claimed via a tax return.
Someone earning £100,000 a year and saving £800 a month into their pension would have missed out on £7,680 if they had not claimed full tax relief due to them, according to figures produced by pension firm Aegon.
The missing tax relief only arises where employers or pension companies use a system known as “relief at source”. If your scheme uses the alternative, “net pay”, you don’t have to do anything: the correct tax relief will be added to your pension automatically.
Your payroll or company pension scheme operator should be able to tell you the system applying to your contributions.
The above is a useful reminder at a time when HRMC announces that the estimated cost of pension tax relief is set to hit a record £41bn raising speculation that the relief may not remain in its present form for much longer.
HMRC’s latest estimates on the cost of principle tax relief shows that for 2017/18 the cost of pension tax relief is predicted to hit £24bn. The addition of £16.9bn in national insurance relief on employer contributions takes the total cost to £41bn.
Plans to increase minimum auto-enrolment contributions, scrap the earnings band and extend the reforms to 18 year-olds will raise the cost of tax relief still further according to analysts.
One commentator is reported as saying “With anaemic GDP growth putting pressure on public finances and the government desperate for funds for other areas such as the NHS, the eye-watering cost of incentivising people to save for retirement will inevitably come under the Treasury’s microscope once again.
Julian Kaye
Dip PFS
Financial Planner
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