SIPP holders, don’t forget your extra pension tax relief

interactive investor urges higher and additional rate taxpayers not to forget to claim back pension tax relief via their tax returns.

interactive investor is urging Self-Invested Personal Pension (SIPP) holders who are higher or additional rate taxpayers not to forget to claim back pension tax relief via their tax returns.

The UK’s second-biggest DIY investment platform is reminding SIPP customers that they must claim tax relief above the basic rate themselves, through their tax return. interactive investor estimates that there are anywhere between 150,000 and 350,000 higher and additional rate taxpayers with SIPPs in the UK (see below).

In particular, anyone who has opened a SIPP in the last 12 months should be aware of how tax relief is applied to ensure they don’t miss out. They will need to register for self-assessment to complete a tax return to claim higher or additional rate relief, if they have not already done so. Interactive investor saw a strong rise in the number of SIPP customers between 2019 and 2020.

• Learn more: SIPP Portfolio Ideas | How does SIPP Tax Relief Work? | Transfer a SIPP

SIPP contributions receive 20% tax relief – the basic rate of tax – automatically (known as a ‘relief at source’ arrangement). However higher and additional rate taxpayers with SIPPs must claim their additional tax relief – equal to a further 20% or 25%, respectively, on any income on which they have paid 40% or 45% tax during the year, through self-assessment tax returns.

In England, Wales or Northern Ireland* someone earning £60,000 is paying 40% tax on £10,000 of their earnings. If they paid £1,600 into their pension over the year, they will automatically receive £400 as basic rate tax relief, bringing the total contribution to £2,000. They would then claim a further £400 (an additional 20%), through their tax return. So the total tax relief earned would be £800 and the total cost of the pension contribution would be £1,200.

About 14% of all taxpayers pay some higher or additional rate tax (an estimated 4.3 million people) in the UK, according to recent HMRC estimates*. The FCA estimates that there are 1.1 million Self-Invested Personal Pension holders (see notes to editors), although industry analysis has put this figure closer to 2.5 million. This suggests at least 150,000 SIPP holders could be higher or additional rate taxpayers (although the proportion of higher or additional rate taxpayers with SIPPs could be higher than the general population, as SIPPs tend to appeal to higher earners). Last year, 11.7 million people filed self-assessment tax returns, according to HMRC, at least 1.6 million of whom are likely to be higher or additional rate taxpayers.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “No one wants to miss out on free money from the government, but higher and additional rate taxpayers are perhaps in more danger of doing so than most if they don’t claim the extra relief on their tax returns.

“Tax relief is a big incentive to put money into a pension, more so for higher and additional rate taxpayers as their contributions attract higher tax relief, because they pay more tax on income.

“This extra relief can be worth thousands of pounds a year. If your employer pays your pension contributions into a SIPP through salary sacrifice, you will get the full tax relief automatically. But if you are paying in yourself, you will have to claim the extra relief through your tax return.”

For most employees, receiving tax relief on pension contributions is simple. Usually, they are taxed after their pension contribution has been paid through salary sacrifice (also known as net pay).

‘Relief at source’ pension arrangements are when your contributions are taken after you have been taxed, and the relief is then requested from HMRC and added to your pension.

SIPP tax tips for higher earners

• If you are opening a SIPP and want to receive automatic tax relief at 20%, choose the ‘net’ option when asked if you want to make contributions net or gross. Or contact the SIPP provider to make sure you have set up your tax relief options correctly.
• Bear in mind it can take your pension platform several weeks to apply basic rate tax relief ‘at source’, as it has to claim the relief from HMRC before adding it to your account.
• When working out your extra tax relief, remember the higher rate applies on income earned above the basic rate threshold, not the full amount of income.
• If basic rate relief is already claimed, remember you are calculating the extra tax relief – so a further 20% (or 25% for additional rate taxpayers) – not the full 40% or 45%.
• You can ask your employer to pay into your SIPP if you have both a SIPP and a separate workplace scheme. If your employer pension contributions are made through salary sacrifice, you won’t need to claim extra relief through your tax return.
• There is a maximum annual allowance of £40,000 (although this is tapered down for higher income earners) and you cannot contribute more to your pension in a year than you earn. You can contribute more than the allowance, but will face an annual allowance charge that cancels out any relief you would have received above the allowance.

Notes to editors

HMRC number of income taxpayers June 2020 * https://www.gov.uk/government/statistics/number-of-individual-income-taxpayers-by-marginal-rate-gender-and-age

FCA Non-Workplace Pensions feedback paper July 2019, 1.1mn SIPPs, page 14 https://www.fca.org.uk/publication/feedback/fs19-05.pdf

The tax relief allowances are slightly different in Scotland https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief.

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