Unclaimed Higher and Additional Rate Tax Relief on Pension Contributions

Many employed people misunderstand how pension contributions into their workplace pension scheme are made on their behalf. This can often mean that higher and additional rate tax relief goes unclaimed.

A common misconception is that higher and additional rate tax relief is given automatically on all pension contributions.

This is only the case if contributions are made on a net pay basis where the employer deducts pension contributions from pay prior to it being taxed via PAYE (common across many occupational pension schemes). Tax relief is also automatically given on pension contributions that are made via salary sacrifice; which is an arrangement whereby an employee contractually agrees to reduce their salary in return for an employer funded pension contribution.

Often employers will offer employees various funding options which act to increase contributions to a workplace scheme if an employee is prepared to pay more into their pension (given as a percentage of their basic salary). These incentives to save should not be mistaken for salary sacrifice arrangements – and therefore the contributions need to be treated differently for tax relief purposes.

The most common types of employer funded pensions are still stakeholder and group personal pensions which are often set up to receive employee contributions on a relief at source basis. In this case, employees’ pension contributions are made from pay that has already been taxed. The scheme administrator then applies to HMRC for the basic rate tax relief and adds this to the individual’s pension fund. Higher or additional rate tax relief needs to be claimed by you as an employee via self-assessment or by contacting the local Inspector of Taxes when the contribution is made.

The need to act in order to claim higher and additional rate tax relief is often overlooked and means thousands of pounds of tax relief can go unclaimed each year.

Example

Client A earns £75,000 per annum gross and contributes £300 per month into their pension from their net pay. They have been doing this for the last five years. Their annual gross pension contribution is £4,500 per annum which means that they are entitled £900 of higher rate tax relief but they have failed to claim this from HMRC.

If a backdated claim is made in the 2020/2021 tax year Client A would receive a tax rebate totalling £3,600 for unclaimed relief in tax years 2016/2017,2017/2018, 2018/2019 and 2019/2020.

In this example the figures are actually relatively modest. We have previously worked with clients where relief on gross pension contributions in excess of £20,000 per annum have gone unclaimed for a number of years. In these situations, a backdated claim can provide a welcome injection of cash (particularly if done in the month of January!)

Actions to Take

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 an employee is claiming for.

For example, we are currently in the 2020/2021 tax year which ends on the 5th April 2021. This means that you could claim back as far as the 2016/2017 tax year which ended 5th April 2017.

To make a claim, you can call or write to HMRC and confirm what your gross employee pension contributions were during a tax year. You will need evidence of that claim – this can be requested from your respective pension providers, which is something a financial adviser can assist with.

Relief could be given in three ways: a tax rebate, an adjustment to your tax code or reduction in the tax that you already owe HMRC.

Reinvesting for Greater Reliefs…

Provided allowances permit, reinvesting any reclaimed relief back into your pension would be a prudent and worthwhile exercise. In the example above, if Client A reinvested £3600 back into their pension, they would receive basic rate tax relief of £900 at source taking their gross pension contribution to £4,500 and providing additional higher rate tax relief of £900.  This would take the total value of the backdated claim to in excess of £5000 – an amount that more than warrants the investment of time!

For more information on the process, or to speak to us in relation a specific client’s circumstances, please get in touch.

 

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