If you are a higher or additional rate taxpayer, there is a simple way to avoid HMRC “taking” as much tax from you.
This is claiming the tax relief you are eligible for on your pension contributions. Despite this being free money, research published in Pensions Age revealed thousands of people do not claim their extra relief. The unclaimed tax relief got close to £2.5 billion over a three year period.
How does pension tax relief work for higher and additional rate taxpayers?
Most basic-rate taxpayers benefit from “relief at source”. This is where pension providers claim basic-rate tax relief of 20% on behalf of their customers and put it in their pensions.
Higher or additional rate taxpayers need to claim the additional 20% or 25% relief from HMRC. Not doing this could be highly detrimental. For every £1,000 paid into a pension, it means losing out on an extra £200 to £250.
How do I claim my extra relief?
The normal way of doing this is via self-assessment. and this could result in the following:
· A change to the tax code
· A rebate at the end of the year
· A reduction in the tax liability.
An alternative to self-assessment is writing to your tax office outlining any pension contributions paid.
How much would it cost me if I do not claim my extra tax relief?
Using an example of someone earning £100,000 a year and paying £20,000 into their pension. The pension provider collects basic-rate tax relief at source. This increases the contribution to £25,000. An extra £5,000 would be available as extra tax relief and the way to claim this would be by completing a self-assessment.
Taken a step further, if this £5,000 were invested for 10 years and grew by 4% a year it could be worth £7,401. Fail to claim this tax relief every year and the cost could be £60,030 based on the same growth rate as before.