Not done your tax return? Unclaimed pension tax relief is a major reason to do so

It is no secret that the amount of unclaimed tax relief from pension contributions is already considerable, and this is destined to rocket higher because of a combination of the soaring numbers of people being drawn into higher rate tax as a result of frozen tax thresholds, relatively high wage growth and many more people having workplace pensions as a result of auto-enrolment.

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Published: 18 Jan 2024 Updated: 18 Jan 2024
Tax Personal tax Pensions

Jason Hollands of Evelyn Partners, the leading wealth management group, comments:

“Few of us enjoy delving through paperwork and filling out forms, so it is human nature to leave these things until late in the day when a deadline looms. With that in mind, the clock is ticking for the final deadline for completing a self-assessment tax return online in respect of the 2022/23 tax year.

“Not only does a failure to file a tax return on time risk a penalty (starting at £100), if tax is owed it will need to be paid by the 31 January deadline, meaning you may have to stump up cash you don’t immediately have to hand. It is therefore very unwise to leave this until the final couple of days, as you may need a few days to juggle money around.

“But one of the most important reasons to file a return is that you may be owned money by the taxman, rather than owe it, especially if you are subject to the 40% higher rate or 45% additional rate of income tax [1] and have contributed to a personal or workplace pension. Do not assume you will automatically get the tax relief you are entitled to. It is no secret that the amount of unclaimed tax relief from pension contributions is already considerable, and this is destined to rocket higher because of a combination of the soaring numbers of people being drawn into higher rate tax as a result of frozen tax thresholds, relatively high wage growth and many more people having workplace pensions as a result of auto-enrolment.

“Nominal wages are rising at levels not seen in many years due to the post-pandemic surge in inflation. The most recent wage data shows UK pay (including bonuses) is rising at 6.5% pa. However,  given the multi-year freeze the Government has put in place for both the personal allowance (£12,570) above which income tax is paid and the threshold for paying higher rate tax (£50,270)[1], as well as a reduction this year in the level at which the 45% additional rate kicks-in (£125,140), increasing numbers of workers are being drawn into the higher tax brackets. It is estimated by HMRC that a record 5.6 million people will pay higher rate tax this year, £1.8 million more than five years earlier.  Last November, the Office of Budget Responsibility ominously forecast that between 2022/23 and 2028/9 the number of people paying higher rate tax will rise by 3 million.

“Many of those slipping into the higher rates of tax for the first time will not have previously had any experience completing a self-assessment tax return or understand the quirks of claiming pension tax relief. These are the people most vulnerable to not claiming pension tax relief.

“Anyone in the higher tax brackets and contributing to a personal pension needs to make sure they are claiming for their higher or additional rate relief by completing a self-assessment return.

“Those paying into a workplace scheme need to check what contribution system their employer uses: if it is a net pay or salary sacrifice scheme, they generally won’t need to do anything; but if it is a ‘relief at source’ system then they will only receive basic rate relief automatically and the rest must be claimed back via self-assessment.

“Unclaimed pension tax relief could be down to either a lack of awareness or simply forgetfulness. You would think that most people who are savvy enough to open a self-invested personal pension would know about higher and additional rate tax relief, so in those cases it would seem to be a very costly oversight. In workplace schemes it’s perhaps more likely that some savers assume that all their tax relief is addressed through their payroll.

“Increasingly, workplace schemes are set up as a salary sacrifice or exchange arrangement where the company makes a gross contribution in lieu of pay or bonus, and many are run on a net pay basis, where again the employee shouldn’t need to take action to claim their reliefs. However, some workplace pension schemes still use relief at source arrangements, so those eligible for higher or additional rate relief will need to make a claim.

“If you realise that you have neglected to claim pension tax reliefs, all is not lost as you can back-claim tax relief for the last four years. You could be owed a substantial sum.”

Hollands added: “Another area, where even financially savvy investors could be missing out, is claiming income tax credits on Venture Capital Trust dividends. Subscriptions to VCT new share issues by eligible UK based investors entitle them to a 30% income tax credit (repayable if they sell the shares within five years). This is one of the key features  of VCT investing and is well understood by those who invest in new offers from time to time.

“Perhaps less understood is that where a VCT they already hold provides a Dividend Re-investment Plan (DRIP) that the investor signs up to, this typically involves the creation of new shares whenever dividends are reinvested, rather than buying shares traded on the market. Where this is the case, it means the reinvested amount is also eligible for a 30% Income Tax credit as it is treated as a subscription to a new share issues. However, to benefit from this, the investors must declare these as VCT subscriptions on their tax return, an easy thing to overlook when you haven’t filled any application forms out.”

ENDS

 

[1] Scotland has different income tax rates and thresholds to the rest of the UK, see here.

Disclaimer for content with tax addition

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

The tax treatment depends on the individual circumstances of each client and may be subject to change in future.

About Evelyn Partners

Evelyn Partners is the UK’s leading integrated wealth management and professional services group, created following the merger of Tilney and Smith & Williamson in 2020. With £59.1 billion of assets under management (as at 31 December 2023), we are one of the largest UK wealth managers ranked by client assets and the seventh largest accountancy firm by ranked by Group fee income (source: Accountancy Age 50+50 rankings, 2023).

We have a network of offices in 30 towns and cities across the UK, the Republic of Ireland and the Channel Islands. Through our operating companies, we offer an extensive range of financial and professional services to individuals, family trusts, professional intermediaries, charities, and businesses.

Our purpose is to ‘place the power of good advice into more hands’, and we are uniquely well-placed to support clients with both their personal financial affairs and their business interests. Our personal wealth management services include financial planning, investment management, personal tax advice and, through Bestinvest, we have a multi award-winning online investment service for self-directed investors. For businesses, our wide range of services includes assurance and accounting, business tax advice, employee benefits, forensics

For further information please visit: www.evelyn.com