Are you in a Defined Contribution Pension, such as a Stakeholder Pension or Personal Pension, or a SIPP? If you’re a higher rate taxpayer, you could be missing out on free cash because you haven’t claimed the correct tax relief on your pension contributions. This would be a shame, as tax relief on contributions represents a major reason for investing in a pension.
TAX RELIEF EXPLAINED
For every £80 you contribute to your pension, your pension company will reclaim a further £20 in tax relief, meaning they invest £100 on your behalf. If you are a higher rate taxpayer, you are entitled to tax relief at the higher rate of 40%.
With a large number of the UK’s 7.9m personal pension savers failing to claim the full amount of tax relief that they are entitled to receive on their pension savings, this could add up to a substantial sum over the course of an average working life.
This often happens because payments into pension schemes are made after deducting basic rate tax at 20%, and many savers who are higher-rate taxpayers overlook the fact that they are entitled to receive 40% tax relief, but may not be aware that they need to claim it via their tax return.
CLAIMING TAX RELIEF
If you complete an annual return, then you should include your personal pension contributions. HMRC will then give you higher-rate income tax relief through your tax calculation. If you don’t complete a tax return, then you should write to them and detail your pension contributions. HMRC should then update your tax code to take account of this, and include an allowance for your contributions in your tax calculation.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.