Tax return deadline: How filling out tax self-assessment can dramatically boost pension tax relief

by | Jan 25, 2023

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Tom Selby

Tom Selby, head of retirement policy at AJ Bell, comments on the pension tax benefits of filling out tax self-assessment:

“Millions of savers contribute billions of pounds each year to pensions, with one of the main incentives being that those contributions receive income tax relief. 

“People often mistakenly assume they will receive all their pension tax relief automatically from HMRC. However, whether you need to make a claim to HMRC to receive the tax relief you are owed will depend on several factors including your income, the type of pension scheme you contribute to and how you contribute.

“Higher earning pension savers who make personal contributions to ‘relief at source’ schemes, such as SIPPs, risk missing out on thousands of pounds in tax relief if they fail to notify HMRC.”

 

How much tax relief could higher earners claim?

“A higher-rate taxpayer who contributes £1,700 to a SIPP in the 2022/23 tax year would receive basic rate relief of 20% automatically. 

“As a result, a £1,700 personal contribution would automatically be boosted by £425 to £2,125 in their pension – but they would need to claim the extra £425 tax relief they are owed from the Revenue. An additional-rate taxpayer, meanwhile, could claim 25% tax relief from HMRC on top of the 20% relief they receive automatically.

 

“Higher-rate taxpayers who make larger pension contributions will have an even bigger incentive to fill out their tax return. For example, a higher-rate taxpayer making a £10,000 personal pension contribution would receive £2,500 basic-rate tax relief and be able to claim an extra £2,500 from the taxman. An additional-rate taxpayer who contributed £10,000 would be able to claim an extra £3,125 from HMRC.”

Personal pension contributionBasic-rate tax reliefPotential higher-rate tax relief reclaimPotential additional-rate relief reclaim
£1,000£250.00£250.00£312.50
£2,000£500.00£500.00£625.00
£5,000£1,250.00£1,250.00£1,562.50
£10,000£2,500.00£2,500.00£3,125.00
£20,000£5,000.00£5,000.00£6,250.00
£32,000£8,000.00£8,000.00£10,000.00

Source: AJ Bell

Do all higher earners need to reclaim pension tax relief?

 

“If you are a higher or additional rate taxpayer and have sufficient annual allowance available for the tax year, you should be entitled to tax relief at your marginal rate. However, you will only have to make a claim to HMRC if you are making personal contributions to a ‘relief at source’ scheme.

“If you are contributing to a ‘net pay’ pension scheme, your contributions will be taken from your pre-tax salary, meaning income tax relief is usually paid automatically. As a result, you shouldn’t need to make a claim as you should already have received the tax relief you are due.

“The exception to this is where someone contributes to a net pay scheme from earnings below the personal allowance of £12,570. In these circumstances tax relief will NOT be granted automatically, although the Government has pledged to address this so-called ‘net pay anomaly’ in the coming years.”

 

How does HMRC pay reclaimed pension tax relief?

“Pension tax relief is not always paid directly into your pension. If you contribute to a ‘relief at source’ scheme, such as a SIPP, you will receive basic-rate (20%) tax relief automatically but will need to claim higher or additional-rate tax relief from HMRC.

“Once your claim is processed, HMRC will usually adjust your tax code in order to pay your extra tax relief. If you don’t have earnings, the Revenue may simply send you a cheque. 

 

“It is possible to backdate pension tax relief claims by up to four years (i.e. up until the 2018/19 tax year). If you are making claims for tax relief you are owed from more than four years ago, it will be at HMRC’s discretion whether or not to accept your claim.”

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