Retirement savers can pick up automatic basic rate tax relief on pension contributions but high earners often miss out on extra relief because of quirks in the tax system.
Under pension rules, savers can claim tax relief on all contributions covered by their annual allowance and earnings in the tax year.
But higher rate taxpayers must make the claim by filing a self-assessment tax return even though basic rate tax relief is claimed automatically by most pension providers.
The deadline for reclaiming additional pension contribution tax relief is January 31 following the end of the tax year when the contributions were made.
For example, for claims for relief in the tax year ending April 5, 2019, the self-assessment deadline is January 31, 2020.
Make a claim or lose tax relief
“It’s up to the pension saver to make sure they’re not getting tax relief on pension contributions worth more than 100% of their annual earnings. HM Revenue and Customs can ask them to pay back anything over this limit,” says HRMC.
The three most common pension set-ups that mean high earners must claim tax relief are:
- If income tax is paid at a rate above 20% and a pension provider claims the first part of tax relief at 20%
- A pension scheme is not claiming automatic tax relief – but no relief is available if the provider is not a registered pension scheme with HMRC
- Pension contributions are paid by a third party
At current tax rates (2019-2020), pension savers can claim additional relief at 20% on income that 40% income tax is paid on or 25% for any amount of income 45% tax has been paid against.
Impact of annual allowances
HMRC gives the example of someone earning £60,000 a year pays 40% income tax against earnings of £10,000 in the 2019-20 tax year, while contributing £15,000 into a pension.
Tax relief at source is paid on the £15,000, but an extra 20% tax relief on £10,000 is available by filing a self-assessment tax return.
No extra relief is paid on the £5,000.
Annual allowances also make a difference to claims. For those paying basic or higher rate tax, the annual tax-relieved contribution amount is set at a maximum of £40,000 unless money has been withdrawn under pension freedom rules, when this amount drops to £4,000.
High earners paying 45% income tax may have a tapered annual allowance dropping their annual allowance to £10,000.