Are you a higher rate taxpayer?
Do you definitely claim your entire 40% tax relief on your pension contributions?
How do you feel about plans to introduce a flat rate of 33% pension tax relief for all taxpayers?
To incentivise saving for retirement, the government currently gives tax relief on all pension contributions. The amount depends on the rate of tax you pay. Those who pay basic rate tax receive 20% pension tax relief, those in the 40% higher rate tax are entitled to 40% pension tax relief. So, your £100 pension contribution only costs you £60. If you earn over £150,000 per year then you are in the 45% tax bracket.
Know your pension scheme
A recent survey carried out by the Prudential uncovered £230 million worth of unclaimed tax relief that belongs to higher rate taxpayers. That’s 180,000 people each losing out on a reported, £1,000+ per year! Even more worryingly, 15% of those asked didn’t know if they were claiming their full pension tax relief.
If you are part of a public sector or company pension scheme then your pension contributions should be deducted by your employer from your salary before tax is worked out. Therefore your pension tax relief is automatically worked out at the correct rate of tax. But some pension procedures, like Group Personal Pension and Stakeholder schemes, only automatically apply the 20% basic rate. The onus is then on the taxpayer to claim your additional 20% entitlement.
Most Retirement Annuity providers do not automatically claim back tax relief. So, if you are putting your own money into a retirement annuity then you could also be missing out by not submitting a claims.
These favourable rates may not be around forever
It is estimated by The Centre for Policy Studies that pension tax relief payments cost £54 billion in the year 2012-2013. The Pensions Policy Institute makes the pertinent calculation that basic rate taxpayers make 50% of the total pension contributions and receive 25% of the total of pension tax relief. The disparity is clear.
The Pensions Minister, Steve Webb, proposes to replace the current two-tier system with one flat rate of 33% pension tax relief for all taxpayers – regardless of earnings. He said, “It is hard to understand why we do it the way we do it; 33% might have an impact”. He does not accept that the present system does its job of encouraging retirement savings “other than for the very rich”. Mr Webb stated that the move would not cost any more as it could potentially decrease the number of people resorting to salary sacrifice tactics to save tax payments.
A fellow at the Centre for Policy Studies, Michael Johnson, supports the idea of a 33% pension tax relief rate saying it, “seemed like a victory for common sense and social justice”. However this is currently not official Liberal Democrat policy. They have committed to reviewing the concept of establishing a single rate of pension tax relief somewhere between 20% and 40%.
Interestingly, Mr Webb is also committed to abolishing the ‘Lifetime Allowance’ which prevents tax relief being claimed on savings over £1.25 million. He explained, “As a Liberal, lifetime allowances don’t work for me because what they say is simply that if you save beyond this level, or your investments grow beyond this level – we will penalise you.” Fair point!
With so many changes in the pension arena pension tax relief is considered a live issue. Mark Twigg, a former government advisor and an Executive Director at the corporate communications agency Cicero, explains, “The vast majority of pension tax relief is paid to higher income earners and in an age of austerity a lot of politicians find this unjustifiable”.
The pension tax relief for higher earners might be changed or abolished, but right now all that matters is that you don’t miss out on what you can reclaim under the current rules.
Your course of action
- Check your pension scheme arrangements to see if you automatically get the full 40% tax relief, or just 20%.
- If you do not fill in a Self-Assessment tax return then you can make a claim for your additional pension tax relief back for the last four tax years.
- If you do submit a Self-Assessment tax return then you can make an amendment to any tax return submitted in the last four tax years.
Remember – This money will never automatically be refunded to you. It is your responsibility to recoup the tax relief you are owed.
