Each year, thousands of people who are outside the self-assessment system do not get the full tax relief on their contributions to personal pension schemes.
HMRC automatically gives tax relief on pension contributions at the basic rate of 20%, but if you pay income tax at 40% or 50%, it is up to you to claim this difference. People frequently overlook this and pay more tax than they need as a result.
The government has a stated aim to encourage saving for retirement, so it effectively rewards you by foregoing the income tax. In simple terms if the individual pays £80 into the pension plan, the Government will pay a 20% tax credit into the plan also. However a 40% taxpayer is entitled to an additional £20 in tax relief on every £80 paid from net salary into a pension plan. So someone who contributes £8,000 net and pays tax at 40%, can claim an additional £2,000 tax refund. In other words it costs the taxpayer just £6,000 to increase their pension plan by a total of £10,000.
Therefore, a 40% higher rate taxpayer who has contributed £8,000 net in pension contributions each year for the last three years, but not claimed their higher rate relief, could now be due a refund of £6,000.
In fact, claims can still be made in respect of any of the last four tax years which means that claims can still be made for 2009/10 and subsequent tax years.
How to claim
To make the claim, you can simply phone or write to HMRC noting relevant details including how much you've paid into your scheme, your NI number, the name and address of your employer, and the dates for which you are claiming. You should also give details of your pension scheme. Alternatively, you can of course complete a self-assessment tax return. There is a section relating to this where you enter your gross contribution (amount paid yourself plus basic rate tax). You can check details of your contributions with your pension provider.
This extra relief will apply to contributions into personal pensions and group personal pensions (which is one of the most common arrangements for people in permanent employment). However, employer contributions do not attract this extra relief. Similarly, anyone in final salary schemes will not be able to claim additional tax relief.
A permanent solution
Having to claim back such tax relief can be permanently avoided if your employer operates a salary exchange scheme, so if they don't offer one – suggest it! With such arrangements, you benefit from higher rate relief at the point of making the payment into the pension scheme while national insurance payments are also reduced. The employer also benefits from a tax saving so it's a win-win situation. Many employers with a salary exchange arrangement also provide a flexible benefits scheme as part of the package which tends to be very appealing to hard-working staff at all levels.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
