Tax relief on pension contributions: are you claiming the correct tax relief?

While pension simplification was introduced on 6 April 2006 (A-Day) the rules governing pension contributions have significantly changed over the last few years, making the provision for retirement more complicated. This may lead to individuals not claiming the correct tax relief in respect of pension contributions paid - are you one of them?
The amount of pension contributions (both employee and personal contributions) that attract tax relief can vary depending on the level of ‘earnings’ and the ‘total income’ received in any one particular tax year. It is therefore sensible to seek relevant advice from a pensions expert when planning for your retirement.

The amount of tax relief received will depend on the rate at which the individual pays income tax. Basic rate taxpayers will automatically receive 20% tax relief on contributions and the pension provider will make the necessary arrangements to obtain the tax relief from HMRC. As a result no further action will be required from the individual.

However, the position for higher and additional rate taxpayers is a little more complicated. As with the basic taxpayer the tax relief of 20% is received at source.

In order to claim higher or additional rate tax relief the pension contributions will (subject to any limits on the level of contributions) need to be included on an individual’s self-assessment tax return. The Income Tax relief is claimed by extending the basic rate band. If a self-assessment tax return is not required, individuals are able to notify HMRC of the level of pension contribution and the additional tax relief can be claimed via a deduction in the PAYE tax coding notice.

Any pension contributions made under a salary sacrifice scheme does not attract tax relief (basic, higher
or additional rate) and therefore no further action is required.

An example:

Mr A is a higher rate taxpayer and makes a contribution of £10,000 on 31 March 2017 to his personal pension.

Mr A’s pension provider will claim the basic rate tax relief at source on the contribution of 20% of the gross amount - £2,500.

Mr A needs to include the pension contributions on his 2017 tax return so that he receives the higher rate tax relief (effectively extending the rate at which Mr A pays tax to 20% rather than 40% by the gross contribution, £12,500). Mr A therefore receives further tax relief of £2,500.

Mr A has received total tax relief of £5,000 for a contribution of £12,500 in his pension.

If you have not notified HMRC that you are making pension contributions or they are not included on your tax return you may be missing out on valuable higher/ additional rate tax relief.

This article was taken from the Summer issue of the Professional Practices Group Newsletter. To download a PDF version of the full newsletter please click here.
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