How to Claim Higher Rate Tax Relief on Pension Contributions

Introduction

One of the significant advantages of saving for your retirement through a pension scheme is the opportunity to benefit from tax relief. For higher-rate taxpayers, the potential to reclaim an additional 20% tax on pension contributions can result in a total tax relief of 40%. This guide will explain the process of claiming higher-rate tax relief on pension contributions and why it is crucial for maximising the value of your retirement savings.

Understanding Higher Rate Tax Relief

Different types of pension schemes exist, and if you are making pension contributions from your taxed income either individually or through your employer, typically into a personal pension or group personal pension, you will not automatically receive tax relief at your marginal rate of tax.

Tax relief ensures that the income you contribute to a pension scheme is exempt from income tax. For basic rate taxpayers, a 20% tax relief is automatically added to pension contributions and paid directly into the fund. However, if you are a higher-rate taxpayer, paying 40% tax on income over the higher-rate threshold, you can claim an extra 20% tax relief on the portion subject to higher-rate tax. This additional relief needs to be actively claimed from HMRC.

Example:

• Annual pensionable earnings: £80,000
• £12,570 (assumed full) personal allowance taxed at 0%
• The next £37,700 taxed at 20% (£7,540 tax)
• Balance charged at 40% (£11,892 tax)
• Gross Pension contribution: £35,000 (£28,000 net of basic rate tax)
• Basic rate tax relief (automatically added back): Total contribution £35,000
• Higher rate tax relief claimable: 20% on proportion of the income over the 40% threshold so £5,946
• Therefore, once the tax relief is claimed the actual cost of the £35,000 pension contribution is only £22,054

How Higher Rate Tax Relief Boosts Your Pension

Higher rate tax relief significantly enhances the value of pension contributions for higher-rate taxpayers. While the tax rate is 40%, the boost in value is approximately 66%. This is due to the way percentages work, turning a £80 contribution to a net cost of £60 after 40% tax to get £100 in your pension fund. Therefore, making pension contributions with higher-rate tax relief is like receiving a 66% boost on the amount contributed. 

Claiming Higher Rate Tax Relief

Unlike basic rate tax relief, higher rate tax relief requires an active claim, which can be done through two methods: self-assessment or contacting HMRC directly. When claiming through self-assessment, ensure you provide the gross pension contribution, including your contributions and the automatic 20% basic rate tax relief. The relief may be provided as a rebate, a reduction in tax liability, or a change to your tax code.

For those preferring to contact HMRC directly, locate the relevant address on your P60 or payslip and provide details of your contributions along with personal information.

Backdated Claims and Limits on Tax Relief

You can make backdated claims for higher rate tax relief, but there is a time limit of the last four tax years. It’s important to be aware of the annual allowance (£60,000 in the current tax year or 100% of earnings if less) on pension contributions.  It is possible to make contributions based on up to the three previous tax years provided you have the relevant earnings in the current tax year to support these higher contributions to avoid exceeding the limits and incurring additional charges.

Contributions from Others and Additional Rate Tax Relief 

Individuals earning a taxable income over £125,140 are subject to tax at the additional tax rate of 45% and in the same way as you can claim 40% relief, you can claim 45% tax relief on contributions to the extent that you pay 45% tax above the this threshold.

Apart from personal and employer contributions, other individuals can contribute to your pension, and you will receive tax relief on these contributions. If you are a higher or additional rate taxpayer, you can claim the excess tax relief as if you made the contributions yourself.

Conclusion

Claiming higher rate tax relief on pension contributions is a valuable step for higher-rate taxpayers to maximise their retirement savings. By understanding the process, individuals can ensure they receive the full benefits of tax relief on their contributions, making pension saving even more rewarding. Seeking advice from financial advisers or accountants can further assist in optimising the value of pension contributions through available tax reliefs.

At Corpad Employee Benefits Limited, we understand the importance of effective communication in ensuring that employees fully engage with and derive maximum value from their employee benefits package. Our dedicated team is committed to delivering tailored communication strategies that enhance employee understanding, appreciation, and utilisation of their benefits. Contact us at ceb@corpad.co.uk.