Pension contribution relief. Are you missing out?

Statistics

Tax relief for pension contributions is available. Estimates of the amount unclaimed vary widely but HMRC has suggested a figure that runs into hundreds of millions each year. The vast majority of this lost tax relief belongs to those who pay tax at higher rates.

Personally paid contributions

If you pay contributions from your bank etc., basic rate tax relief (20%) for most types of pension scheme is given at source. For example, if a pension plan is for contributions of £100 per month, you pay £80 and HMRC pays £20. If you are a basic rate taxpayer there is no action to take but this is not the case if you pay tax at a higher rate. You are entitled to tax relief at the highest rate of tax you pay, but you must request the relief from HMRC by declaring it on your tax return. So many people miss out on this especially those who do not complete a self-assessment tax return.

To obtain higher/additional rate tax relief for your contributions you must claim it each year on your tax return or by writing to HMRC giving amounts and details of your contributions.

The amount of contributions on which you can claim tax relief is limited. The limit, known as the annual allowance, is usually £40,000 per tax year but can be a reduced to as little as £4,000. Always check your limit, especially if you are a higher earner.

If you have a pension plan which began before April 1988, known as a retirement annuity contract (or “section 226” or “section 226A” contract), tax relief at source does not apply. Whether you pay tax at the basic or higher rates, to obtain tax relief for your contributions you must claim it each year on your tax return. If you do not complete a tax return, write to HMRC giving details of the contributions you are claiming relief for.

Workplace pension contributions

If your employer deducts pension contributions from your salary under its auto-enrolment or other workplace pension scheme, your entitlement to tax relief is the same as that for personally paid contributions. However, the method of obtaining relief can be different. There are two alternatives: net pay or relief at source. It might not be clear which your firm uses as different payroll software has different ways of showing it.

Ask your employer or pension provider which method your workplace pension uses.

Net pay. If your employer uses the net pay method, you are receiving all the tax relief you are entitled to whatever rate of tax you pay on your total income. It even gives the correct tax relief if you pay no tax on your salary. You therefore do not need to claim any further tax relief or disclose the contributions on your tax return. Be aware that the annual allowance trap mentioned earlier does apply and you should check you are not getting too much tax relief.

Relief at source. If your employer uses the relief at source method, the position is exactly the same as for personally paid contributions. If you pay higher rates of tax on your total income you will need to claim the extra relief you’re entitled to.

If you pay income tax at higher rates and pay pension contributions from your own funds, you are entitled to extra tax relief on the contributions. To get the extra relief you must submit a claim to HMRC. The position is the same as if you pay contributions through your firm’s workplace pension scheme, unless your firm uses the net pay method.