Complex and often overlooked tax rules could cost taxpayers up to £2,500 annually in unclaimed pension tax refunds from HMRC, experts have warned.
This issue affects thousands of high earners contributing to private pensions, such as self-invested personal pensions (SIPPs), personal pensions, and even some workplace schemes.
Higher-rate taxpayers, entitled to 40 per cent tax relief on pension contributions, are falling into a little-known tax trap. Many pension schemes automatically apply just 20 per cent tax relief, leaving individuals responsible for claiming the additional relief themselves.
Personal pensions, including SIPPs, provide a flat 20 per cent tax relief to all members, regardless of their tax bracket. For higher-rate taxpayers, the remaining 20 per cent relief is only available if they actively claim it – either through a self-assessment tax return or by contacting HMRC directly.
Generous pension tax rules are an “enormous incentive” and provide a significant boost to retirement savings, explains Helen Morrisey, head of retirement analysis at Hargreaves Lansdown.
For a basic taxpayer, “a £1,000 pension contribution only costs them £800. For higher and additional rate payers it is even more attractive with the same contribution only costing them £600 and £550, respectively”.
However, Morrisey warns that this pension tax relief is not automatic.
“Many private pensions, such as SIPPs and some workplace pensions are set up under ‘relief at source’ with contributions deducted from your salary after tax.
The employer takes 80 per cent of the contribution from the employee’s salary and then reclaims the extra 20 per cent from HMRC. This means if you are entitled to tax relief at a higher rate, then you need to reclaim it which you can do via online self-assessment. Alternatively you can contact HMRC.”
Myron Jobson, senior personal finance analyst at interactive investor, said: “The fiddly rules can trip up taxpayers who assume that pension tax relief is applied as standard to all pension contributions.
“Understandably, many people don’t realise there are extra hoops to jump through when it comes to claiming 40 per cent tax relief. It’s vital to understand the pension tax rules if you want to minimise your tax bill.”
Jobson urges higher earners to review their contributions and claim rebates for previous tax years if eligible. Missing out could mean losing thousands in valuable savings over time.
Claiming this money back in your tax return is the easiest way and means you’ll get a refund quickly. For an online tax return, you must submit it by midnight 31 January, 2025. However, there are other ways to claim if you miss this.
Jobson adds: “The tax rebate due can be significant, even for modest pension contributions. An individual taxpayer making pension contributions of £100 each month, or £1,200 per year to a SIPP could be owed a tax rebate of £300, assuming they pay higher rate income tax of 40 per cent.”
Data from interactive investor reveals that a higher-rate taxpayer contributing £2,000 annually to a private pension could be owed a £500 tax rebate. This increases to £1,250 for a £5,000 contribution and £2,500 for a £10,000 contribution. Over 10 years, someone contributing £10,000 each year could miss out on over £27,000 in unclaimed tax relief.
How to claim back tax relief
The good news is that most workplace pension schemes are not affected by this issue. Morrisey explains that “net pay” schemes, which deduct pension contributions before tax, automatically provide full tax relief.
“This means you don’t need to take any further action,” she adds. Similarly, if your pension is set up through a salary sacrifice arrangement, there’s no need to reclaim extra relief. The tax benefit is applied directly to your contributions.
Clare Moffat, head of technical and marketing compliance at Royal London, emphasises the importance of knowing your pension scheme type.
“If you’re contributing to an individual personal pension, a SIPP, or a workplace pension like a group personal pension, and are a higher or additional-rate taxpayer, you’ll need to claim tax relief from HMRC.” She advises, “If you’re unsure what type of workplace pension you have, check with your employer or pension scheme”.
She adds that higher-rate taxpayers may have an additional opportunity to claim a tax rebate if they have donated to charity. “If you donate through payroll giving then you don’t need to do anything. However, if you’ve donated money to charity directly then you can also claim back the difference between basic rate and higher or additional rate tax.”
Moffat explains that you have a few options if you are owed a tax rebate. “If you need to apply for your tax relief then you can either do this in your tax return, if you fill one out, or by phoning up HMRC.” You can also write to HMRC with details of your private pension payments.
If you realise you’ve missed out then you can also claim a rebate for previous tax years, says Morrisey. “You can backdate claims for the past four tax years. You will need to keep records of your contributions for these periods in case HMRC asks for them.
“The extra relief will be paid into your bank account rather than directly into your pension so it’s important to make sure that you make the most of your retirement planning by then paying it into your pension.”
