Are you missing out on thousands?
As way of encouraging everyone to save for their future, the government give an incentive in the way of tax relief.
When you get tax relief on your pension, some of the money that you would have paid in tax on your wages goes into your pension pot rather than to the government.
- Basic-rate taxpayers get 20% pension tax relief
- Higher-rate taxpayers can claim 40% pension tax relief
- Additional-rate taxpayers can claim 45% pension tax relief
The tax relief for Basic-rate taxpayers is automatic and claimed back from the government by the pension scheme.
However, Higher-rate and Additional-rate taxpayers only get 20% relief claimed by their pension scheme. They need to claim the additional relief themselves.
This is where many could be missing out on thousands of pounds worth of tax relief!
How do I claim pension tax relief?
The way that the pension relief works depends on the type of pension scheme that you are saving into.
'Net Pay'/Salary Sacrifice Arrangement
If your pension scheme is set up as a 'net pay' arrangement or a type of salary sacrifice, then all of the tax relief for basic, higher and additional rate taxpayers is automatic.
You are getting all of the relief you are entitled to as your pension deductions are taken before tax.
Tax Relief at Source
If your pension scheme is set up as a 'Relief at Source' scheme then you could be missing out.
These types of schemes are set up so that the pension contributions you make are paid after tax deductions. Your pension provider would claim back 20% tax relief from HMRC on any contributions that you make to the pension.
However, if you are a higher or additional rate tax payer, you are not given the additional 20%/25% relief automatically.
Instead, you need to complete a self-assessment tax return to receive the extra tax relief due.
How much am I missing out on?
If you are a higher rate taxpayer, you are missing out on 20% tax relief.
For Example,
If you contribute £800 per month net to your pension, then your pension provider will claim 20% tax relief and gross that up by £200 per month. This would mean that you would get £1,000 per month contributed to your pension pot.
But, you would still be missing out on the extra 20% tax relief. This is tax that you will have paid on your wages.
I.e. £1,000 wages less 40% tax = £600
This 20% or £200 in this instance (£800 paid - £600 received) can be claimed back from HMRC.
In this instance, that would be twelve months of £200 so a total of £2,400 that would be recoverable from HMRC. If that relief hasn't been claimed for years, then you can go back and claim a number of years missed relief which could add up to a significant tax repayment.
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