2nd October 2013
Thousands of higher rate taxpayers paying into workplace pension schemes are collectively losing more than £229m a year in tax relief.
Research from insurer Prudential found that more than a quarter of people with defined contribution pension schemes are failing to claim the full 40% tax relief they are entitled to.
This equates to an estimated 182,500 higher rate taxpayers failing to maximise their tax relief and losing out on around £1,255 a year.
The amount of tax relief not being claimed could be even higher as another 15 per cent of higher rate taxpayers with defined contribution pension schemes do not know whether they are claiming the relief which can be worth as much as £1,255 a year.
This year’s Budget lowered the starting point for paying higher rate tax at 40 per cent from £42,475 to £41,451 potentially meaning more employees paying into defined contribution schemes could be eligible for higher rate tax relief.
Higher rate taxpayers should act now to check whether they are claiming the maximum they are entitled to and to reclaim any tax relief they have missed out on in the past – those who fill in an annual tax return can make claims for contributions paid as far back as the 2011/12 tax year while those who do not fill in tax returns can claim as far back as the 2009/10 tax year but the deadline is 31 October.
The research found around 78% of the 900,000 higher rate taxpayers potentially affected pay into defined contribution pension schemes making average contributions of 10% on average salaries of £62,774.
Basic 20% tax relief is worth £104 on a monthly contribution of £523 but the additional 20% for higher rate taxpayers would add another £104.
How does it work?
Members of workplace pension schemes receive basic and higher rate tax relief automatically through their payroll. But members of personal pension schemes, including GPPs (Group Personal Pension Schemes), SIPPs (Self Invested Personal Pensions) and stakeholder pensions, only receive basic rate 20 per cent tax relief automatically. They need to claim the additional relief through their annual tax return or by informing HMRC.
Clare Moffat, Prudential’s tax expert, says: “Failing to claim higher rate pension tax relief can have a major impact on income and it is clear that a substantial number of higher rate taxpayers are not claiming the relief they are entitled to.
“There cannot be many people who would happily give up as much as £1,255 a year and substantial numbers of higher rate taxpayers can take action now to significantly improve their pension savings.
“The good news is that it is possible to reclaim tax relief you have missed out on and that claims can be backdated for up to three tax years if you do not fill in a tax return yourself.”
The research found 59 per cent of respondents said they did claim all the pension tax relief they were entitled to and that around 60 per cent of higher rate taxpayers paying into defined contribution schemes do fill in tax returns themselves.