What you need to know if you’re a high earner missing this important tax relief
Many higher earners failed to claim a valuable tax rebate in recent years. That’s according to This is Money, which revealed that the unclaimed sum reached a staggering £1.3 billion between 2016 and 2021.
It added that research by PensionBee also found that 75% of eligible higher-rate taxpayers and half of additional-rate taxpayers failed to claim all of the rebate owed to them by the government.
The rebate in question is Income Tax relief on pension contributions, and if you’re not claiming all of the cash owed to you by the government, the long-term value of your retirement fund could suffer. As a result, your standard of living could be reduced when you stop working.
One reason you might not be getting your full tax relief as a high earner, is that you may not realise that you need to take action to claim all of your rebate. Read on discover more, and why working with a financial adviser could make the process of claiming your rebate easier.
Before you do though, let’s consider how Income Tax relief works on pension contributions.
The government uses tax relief to top up your pension contributions
As the government wants people to be able to support themselves later on in life, they provide incentives to those who put money aside for retirement. This means that it gives you back all or some of the Income Tax paid on the money placed into a pension.
Because of this, in England, Wales and Northern Ireland, every £100 you contribute normally costs you:
- £80 if you’re a 20% basic-rate taxpayer
- £60 if you’re a 40% higher-rate taxpayer
- £55 if you’re a 45% additional-rate taxpayer.
With workplace pensions, there are different ways that your employer can make contributions to it, something we’ll look at next. Levels of Income Tax relief in Scotland are not the same due to its different Income Tax regime.
Your employer could make ‘net pay’ or ‘relief at source’ contributions
Employers typically contribute into workplace pension schemes in two different ways. These are:
- relief at source – your employer pays into your workplace pension and the pension provider then claims the 20% basic rate of Income Tax back from HMRC. If you’re a higher- or additional-rate taxpayer, you will need to claim the additional 20% or 25% tax relief from HMRC
- net pay – your employer places your contribution into your pension before Income Tax is calculated and paid. This means that your full tax relief is effectively already provided, meaning that there is no need to claim anything back from HMRC.
With this in mind, you may want to ask your employer's payroll department whether your scheme is on a 'net pay' or 'relief at source' system. If it’s the latter – or you contribute into a private pension – you’ll need to act in order to receive your full rebate.
Higher earners claim their full tax relief via self-assessment
When you contribute to your pension scheme, HM Revenue & Customs (HMRC) returns the basic rate of 20% to your pension provider, which is done automatically.
If you’re a higher- or additional-rate taxpayer, you’ll need to submit a self-assessment to HMRC to claim your additional 20% or 25%. While completing a self-assessment may not be something you relish, a financial adviser could help you to fill in yours.
This could take the strain out of filling in your assessment, and ensure you meet the deadline of 31 January. Additionally, a financial adviser can help you to understand how much pension rebate you might be due, and whether you might be affected by the ‘tapered annual allowance’.
The amount of relief you receive depends on your Annual Allowance
While you can normally contribute any amount to your pension pot, the amount that receives tax relief is typically limited to your Annual Allowance. In 2023/24, this is £60,000 or the amount you earn, whichever is the lower.
If you’re a high earner, your Annual Allowance could be different under the tapered annual allowance rules. It means that your allowance could drop to just £10,000 if you earn more than £260,000 (2023/24).
Your allowance could reduce to £10,000 if you’re in receipt of pension income under the Money Purchase Pension Allowance (MPAA). As the regulations around MPAA are complicated, speak to a financial adviser to confirm whether you might be affected by it.
Get in touch
Working with a financial adviser could make reclaiming all of your tax relief easier and provide peace of mind that your financial future is in safe hands. If you would like to discuss how we could help you get more from your pension, please call us on 01527 577775 or speak to one of our advisers, as we’d be happy to help.