Interactive Investor

Third of higher-rate taxpayers could be missing out on thousands in pension tax relief

Alice Guy, head of pensions and savings, shares the findings of an interactive investor flash poll.

9th January 2024 14:06

by Alice Guy from interactive investor

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  • With less than a month to go to the self-assessment deadline (31 January), new interactive investor research finds that a third of higher-rate taxpayers could be missing out on additional 20% tax relief on their pension contributions by not completing a self-assessment tax return.
  • A higher-rate taxpayer paying £5,000 into a private pension each year could potentially miss out on £1,250 each year due to missing pension tax relief, while someone paying £10,000 into a private pension each year could miss out on £2,500 in annual pension tax relief.
  • Missing pension tax relief could significantly reduce retirement wealth, with up to £122,000 lost pension wealth (comparing someone who paid their annual tax rebate into their pension over 20 years).

A flash poll by interactive investor shows that one-third of higher-rate taxpayers who save into a private pension are potentially missing out on higher-rate pension tax relief, based on survey of website users between 3 to 4 January 2024.

Respondents were asked if they paid into a private pension or SIPP during the tax year ending April 2023 and if they were higher-rate taxpayers. They were then asked if they had or intend to claim additional tax relief back through their tax return.

Pension tax relief allows taxpayers to get income tax back on their pension contributions, meaning it only costs £80 to pay £100 into a pension for basic-rate taxpayers and £60 to pay in £100 for higher-rate taxpayers.

But higher-rate taxpayers who pay into a private pension or SIPP only get 20% tax relief automatically added on top of their pension payments. They will need to claim the additional 20% tax relief through their tax return and will receive it as a rebate or deduction from other tax due.

In addition, employees who pay into a relief at source pension scheme will only get 20% tax relief automatically. Higher-rate taxpayers will need to claim the additional 20% tax relief through their tax return or by writing to HMRC with details of their pension contributions.

Higher-rate taxpayers who made contributions to a SIPP or private pension during the tax year ending April 2023

Have/will you claim back extra pension tax relief through your tax return?

Yes

67.5%

No

17.0%

Don't know

15.5%

No or don’t know

32.5%

Details of poll – poll was conducted on interactive investor website between 3 – 4 January with 1,063 respondents.

Interactive investor calculations also show the potential value of missing pension tax relief to someone who is a higher-rate taxpayer.

Higher-rate taxpayers who don’t do a tax return or don’t add pension payments to their tax return will potentially receive only 20% tax relief on their pension contributions and could miss out on pension wealth of up to £122,000 over 20 years, compared to someone who received a tax rebate and paid it into their pension over the same period.

Details of pension tax relief for higher-rate taxpayer

Scenario 1

Scenario 2

Annual pension contribution before tax relief added

£5,000

£10,000

Annual pension contribution after basic tax relief added

£6,250

£12,500

Annual rebate due

£1,250

£2,500

Potential lost rebate over 20 years (assuming contributions and rebate increase by 2% each year)

£30,371

£60,742

Potential pension wealth after 20 years without added rebate

£243,197

£486,394

Additional wealth if rebate paid into pension

£60,819

£121,638

Assumptions and methodology: 5% annual investment growth net of fees, 2% increase in contributions and rebate paid each year.

Alice Guy, Head of Pensions and Savings, interactive investor says: “Pension tax relief is the jewel in the crown of the UK pension system, topping up a pension contributions with additional tax relief. But many higher-rate taxpayers are missing out on the full tax benefit of pension tax relief, and it could have a huge knock-one impact on their retirement wealth.

“Many people assume they automatically get all the pension tax relief they’re entitled to, but for higher-rate taxpayers, that’s simply not the case. Ultimately, this is free money, and not claiming additional tax relief you’re entitled to means you could lose out on thousands of extra income each year.

“Claiming back extra tax relief allows you to further boost your long-term wealth, especially if you pay your rebate straight back into your pension. A higher-rate taxpayer who contributes £10,000 into their private pension each year, could boost their pension wealth by up to £122,000 over 20 years by claiming a rebate and adding it into their pension (assuming they achieve 5% investment growth).

“If you don’t complete a tax return then you can write to HMRC to provide details of any private pension contributions during the year. Higher-rate taxpayers who contribute to a relief at source workplace pension scheme will also need to claim the additional tax relief on their pension payments as it won’t be given automatically. You can also claim back missing tax relief for the previous three tax years as well as the current tax year.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.

Related Categories

    TaxPensions, SIPPs & retirement

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