Analysis of Freedom of Information data and new consumer research by InvestEngine, found that millions of higher and additional rate taxpayers are failing to claim back tax on their personal pensions
Over 2.3million people in the UK are missing out on a major cash boost by making this one mistake with their pension savings.
Analysis of Freedom of Information data and new consumer research by InvestEngine, found that millions of higher and additional rate taxpayers are failing to claim back tax on their personal pensions. Currently, 7.4 million people pay higher or additional rates of tax on their earnings and also pay into a personal pension. This means they are eligible for pension tax relief – but 2.3 million are failing to claim it.
The investment firm noted that this failure could reduce the value of the pension by hundreds of thousands of pounds.
In England and Wales, there are three tax brackets. The basic is 20%, which you pay on earnings over the Personal Allowance of £12,570 a year. You start paying the “higher” tax bracket of 40% on earnings over £50,271. Finally, if you earn over £125,140 a year, you will pay the “Additional” tax rate of 45%. Scotland has their own tax bands which are different from the rest of the UK.
InvestEngine is urging higher and additional rate taxpayers saving into a pension to ensure they are claiming all eligible relief. This includes considering the power of making additional contributions to their pension where possible, which would get them further tax relief and boost their overall retirement fund.
There are two types of pension schemes for tax relief relating to personal contributions. Most workplace pensions collect personal contributions from people’s overall income. In these circumstances, both the individual worker and their pension scheme do not need to claim any tax relief.
However, most personal pensions and some workplace pensions receive their personal contributions after income tax has been deducted. In this scenario, the pension scheme will automatically collect the 20% basic rate of tax relief from HMRC and add it to the individual’s pension.
This means that the balance of the relief due to higher (40%) and additional rate (45%) taxpayers is not automatically collected. Instead, to claim relief on earnings taxed at the higher rate, individuals will need to file a self-assessment tax return with HMRC. According to the tax authority, between 2016 and 2021 £1.3billion of tax relief went unclaimed.
If a higher-rate taxpayer contributed £400 per month to their pension for 40 years, it would be worth £192,000. The government would automatically contribute an additional 20%. This would be worth £1,200 per year, or £48,000 over 40 years.
But if they were to claim additional tax relief on any money taxed at the higher rate through a self-assessment tax return, this could equate to an additional £1,200 per year. If they were to pay this into their pension, it would mean that over 40 years, the government would top up their pension by an extra £108,000.
For those able to invest the maximum tax-free amount per year (100% of someone’s salary or £60,000, whichever is lower), including claiming the maximum amount of tax relief, with a pension fund growth of 7% per year, they would end up with £1.6m after 40 years. However, those who fail to take advantage of the higher rate of relief would find their pension worth more than £350,000 less.
Andrew Prosser, Head of Investments at InvestEngine, said: “We know that as a whole people in the UK aren’t saving enough for the retirement they want, but those who are able to put away good sums may still be losing out by not claiming all eligible tax relief while being hit with high fees.
“Over time this could reduce pension pots by hundreds of thousands of pounds. Those paying the higher rate of tax and contributing to a personal pension should ensure they are claiming back all eligible tax from HMRC, while checking their pension provider’s fees to see whether they could be getting a better deal elsewhere.