£1.3 Billion in pension tax relief left unclaimed

An estimated £1.3 billion in pension tax relief remains unclaimed in the UK, according to a Pension Bee freedom of information request in 2023, from the 2016/17 tax year to the 2020/21 tax year.

Many staff are unaware that pension tax relief can be claimed for higher or additional rate taxpayers.

If your contributions are collected via salary sacrifice, you do not need to do anything because contributions are collected pre-tax by sacrificing a portion of your total income.  

However, you may be entitled to claim for previous tax years. Read on to discover more.

When it comes to filing your annual self-assessment tax return, claiming your entitled pension tax relief is paramount. Yet, despite its financial benefits, many higher-rate & additional-rate taxpayers in the UK overlook this crucial step. Discover why it’s vital to claim your pension tax relief, how it works for higher earners, and the potential costs of missing out on significant savings.

Understanding Pension Tax Relief for Higher Earners

For basic-rate taxpayers, pension providers typically automatically apply tax relief on their behalf. However, higher- and additional-rate taxpayers must actively claim the additional 20% or 25% relief from HMRC, usually through their self-assessment tax return. This additional relief can substantially reduce the cost of pension contributions, making it a valuable incentive for higher earners to maximise their savings.

The Consequences of Overlooking Tax Relief

New research has highlighted the alarming trend of higher-rate taxpayers failing to claim their entitled tax relief. Between 2016 and 2019, an average of 80% of higher-rate taxpayers eligible for relief through self-assessment tax returns and an estimated 53% of additional-rate taxpayers neglected to do so. This oversight resulted in over £810 million in unclaimed tax relief during the 2018/19 financial year alone.

The Potential Cost of Inaction

To illustrate the impact of failing to claim tax relief, consider this example: Suppose you earn £100,000 annually and contribute £20,000 to your pension, with basic-rate tax relief applied at source. You could potentially miss out on significant long-term savings by not claiming the additional £5,000 relief through your tax return. Over 20 years, assuming an annual return of 4%, this could result in a retirement pot £159,000 smaller than it could have been.

Tapered Annual Allowance: A Consideration for High Earners

For those earning over £200,000, the Tapered Annual Allowance may further impact the amount of tax relief available. This mechanism reduces the Annual Allowance by £1 for every £2 of adjusted income above £260,000, potentially limiting tax-efficient pension contributions. High earners need to work with financial planners who can devise tailored strategies to optimise their retirement planning considering these allowances.

How it works

You may be able to personally claim higher-rate and additional-rate tax relief on your pension contributions, and this can be done in two ways:  

  1. Through your annual self-assessment tax return. More details can be found on https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief  regarding deadlines and how to proceed.
  2. Alternatively, you can call HMRC directly. You need details such as: the personal pension scheme that personal contributions are being paid to, the date that the contributions start, and the gross amount of the personal contributions paid.

Tax relief is given in one of three ways:

  • a change to the tax code.
  • a tax rebate.
  • a reduction in tax already due to HMRC.

There is a time limit of four years to claim back any tax relief from HMRC. A claim must be made within four years of the end of the tax year that a member is claiming.

Take Control of Your Financial Future

Don’t let valuable tax relief slip through your fingers. Claim the relief you’re entitled to to maximise your pension savings. If you need assistance navigating the complexities of pension tax relief or optimising your retirement planning, contact us today at [email protected] or call 01273 076587.

This blog is for information purposes only and should not be relied upon for advice.


About the author
Oliver McDonald
Oliver McDonald
Oliver is the managing director and independent financial adviser at Engage Wealth Management.
Share this post