Young Professionals – Claiming Higher Rate Pension Tax Relief
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It is estimated that approximately 80% of higher rate tax payers are likely to be missing out on unclaimed tax relief on personal pensions (source: PensionBee) and this article will look at how tax relief works and, more importantly, how you can claim higher rate or additional rate tax relief.
The first thing to be aware of is that higher rate tax relief is not automatically given and that you have to claim it. Before we look at how to claim it let’s first look at what pension tax relief is.
Pension Tax Relief
Currently anyone under the age of 75 with relevant UK earnings can receive tax relief when they make a pension contribution. This is known as ‘relief at source’.
Basic rate tax relief of 20% is automatically added to your pension contribution and paid directly into your pension fund. The tax relief is claimed from HMRC by the pension provider.
As an example, an individual contributing £8,000 into their pension will receive tax relief of £2,000 meaning that £10,000 will end up in their pension.
For most Workplace Pensions and Personal Pensions operated by large insurance companies, basic rate tax relief is added straightaway. If you pay a contribution into a Self-Invested Personal Pension (SIPP), there could be a six to eight week delay in receiving the tax relief.
If you are a higher rate or additional rate tax payer you can claim a further 20% or 25% respectively. (Note that there are slight differences for those in Scotland.)
How to Claim
There are two ways to claim higher or additional rate tax relief.
The first is to claim the additional tax relief via a Self-Assessment Tax Return. You should remember to use the gross amount in the relevant section. Anyone earning over £100,000 should be asked to complete a Self-Assessment Tax Return.
The relief will be used to offset other tax due, be provided to you as a tax rebate or used to change your tax code.
The second way to claim is to telephone or write to HMRC. The address will be on your P60 or alternatively you can use:
Pay As You Earn and Self-Assessment,
HM Revenue and Customs,
BX9 1AS,
United Kingdom
If writing, you will need to include proof from your pension provider of the contributions paid in the tax year you’re claiming for. Also, it would be sensible to include your National Insurance Number and date of birth.
You will need to submit a new letter every time you alter your pension contributions or your salary changes. This could mean that the Self-Assessment route might be more convenient although it may take longer to get the relief.
Backdated Claims
If you have previously missed out on claiming higher rate or additional rate tax relief you can make backdated claims for the past four tax years.
What About Different Types of Pension Schemes?
If you are making pension contributions by way of ‘Salary Sacrifice’ or via a ‘net pay’ arrangement all of the tax relief including higher and additional rates will be applied automatically as contributions will have the effect of reducing your salary with the specified amount being directed into the pension scheme. Similarly, with Defined Benefit Schemes, contributions are made from gross rather than net pay.
Summary
Claiming higher rate tax relief is something that is frequently overlooked especially if you are a higher rate tax payer and don’t submit a Self-Assessment Tax Return.
Contact Us
If you need any help or wish to discuss your pensions in more detail, please do contact us.
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