URGENT UPDATE: Millions of employees could be handing over thousands of pounds to HMRC by failing to claim tax relief on their pension contributions, as the January 31 self-assessment deadline rapidly approaches. According to Penfold, a leading pension provider, many higher-rate taxpayers mistakenly believe their pension tax relief is automatically applied, leaving significant funds unclaimed.
With 7.1 million individuals now liable for higher-rate income tax—an alarming 38.7% increase from just three years ago—financial experts warn it’s critical for workers to review their pension contributions before the deadline. Chris Eastwood, CEO of Penfold, emphasized that the confusion over pension tax relief is costing savers dearly.
“We regularly see people paying higher-rate tax who assume all their pension tax relief is handled automatically,”
Eastwood stated.
“In many cases, it isn’t, and the result is money being left on the table that HMRC won’t pay back unless it’s claimed.”
For most personal pensions, providers automatically apply basic-rate tax relief at 20%. However, those earning over the basic-rate threshold and contributing to personal pensions or workplace schemes using the relief at source system may be eligible for more—specifically, the higher 40% or 45% rate, which must be claimed proactively.
As of this tax year, approximately 1.23 million taxpayers will be subject to the additional 45% rate. This rapid escalation is largely due to frozen income tax thresholds, which have remained unchanged since April 2021 and are expected to stay the same until at least 2030/31.
Eastwood explained the financial implications: a higher-rate taxpayer making a substantial pension contribution can significantly reduce the cost of that contribution. For instance, a contribution of £10,000 could effectively cost just £6,000 once all tax relief is claimed. Not claiming the additional relief means paying more tax than necessary, impacting retirement savings.
Workers using salary sacrifice or net pay pension schemes typically receive full tax relief automatically, as contributions are deducted from wages before tax is calculated. However, many personal pensions and certain workplace schemes operate using relief at source, applying only the basic-rate relief by default.
Eastwood urged employees to grasp how their pension operates. If unsure about whether their scheme employs relief at source, it is essential to verify this, especially with the January deadline looming.
While the January 31 self-assessment deadline doesn’t require fresh pension contributions, it is the final date for declaring income and securing tax relief for the previous tax year. Eastwood remarked,
“January is an important moment to review contributions made during the tax year and ensure any higher-rate relief is correctly claimed.”
Claiming pension tax relief isn’t about gaming the system but ensuring individuals receive the tax benefits intended by Parliament and avoid overpaying taxes.
To secure higher-rate pension tax relief, employees affected by the 40% or 45% income tax rates must ensure their pension operates under relief at source. Those submitting a tax return should record pension contributions in the pensions section. If not typically submitting a return, individuals may still be eligible to claim through HMRC directly.
With the deadline approaching, now is the time to act. Don’t leave your hard-earned money on the table—review your pension contributions and ensure you claim what you are rightfully owed.
