Pension savers alerted to claim higher and additional rate tax relief

The UK’s pension savers must be careful not to lose out at this time of year by forgetting to claim tax relief that is rightfully theirs.

Nearly two million more people are estimated to be paying the 40% higher rate of tax in this financial year compared to 2022/23 - which means there could be many thousands of savers out there unaware that they are leaving a chunk of cash with HM Revenue & Customs unless they take proactive steps to claim it. Likewise, in the same period the number of additional rate taxpayers has grown by about 660,000.

Research suggests that hundreds of thousands of higher and additional rate taxpayers every year are forgetting to claim back pension tax relief to the tune of about £250million.[1] As many as a third of higher-rate taxpayers every year could be missing out on an additional 20% tax relief on their pension contributions.[2]

Gary Smith, Financial Planning Senior Partner and retirement specialist at wealth management firm Evelyn Partners says: ‘Pension tax relief is the outstanding benefit of the UK’s private pension saving system, so it would be foolish to pass it up. Those who have only recently started paying higher-rate tax might be the most at risk of losing out as many will be unaware of the need to do this.

‘Those who are used to doing annual tax returns might be less likely to overlook this essential task, but millions of pension savers are PAYE and not registered for self-assessment. Even those who are, need to make sure they use their tax returns to claw back tax relief they are owed as well as paying what they owe to HMRC.

‘By not claiming back the tax relief they are entitled to on pension contributions already made, higher and additional rate taxpaying savers could be inadvertently sacrificing thousands of pounds – at a time when frozen thresholds and allowances mean that millions of taxpayers in recent years have been drawn into paying a higher rate of tax on their income.

'There’s obviously not much point paying into a pension to save on income tax and then throwing away a big part of the saving.

‘Anyone paying into either a “relief at source” pension scheme or a personal pension like a Self-Invested Personal Pension (SIPP) will contribute sums out of net pay, after income tax has been deducted. Basic rate tax relief at 20% will be added automatically by the pension provider - but if you have paid tax on your income at the higher rate of 40% or additional rate of 45%, you will then need to proactively claim back the extra 20% or 25% in relief from HMRC.

‘It might be that some employees are misled by the term “relief at source” which could be taken as implying that all relief is taken care of at the point of contribution. Rather, it is in “net pay” or salary sacrifice systems that relief at all levels is granted automatically.

'As a first step employees should check what sort of system their workplace scheme uses if they aren’t sure. They can specifically ask their HR people or the pension provider if all their tax relief has been added to their contributions.

‘All personal pension savers meanwhile – whether it is a policy with one of the big insurers, a stakeholder pension or a SIPP - can assume they need to take action to claim back higher or additional rate tax relief.

‘From 1 September 2025, HMRC has put stricter requirements on claims for pension tax relief, requiring everyone to evidence their claim for higher amounts. Previously, the requirement to evidence a claim was only placed on those paying in more than £10,000. Your pension provider will have the necessary documents, which are often available online.

‘This tax relief can be claimed on a tax return, but if you are PAYE and have no other reason to register for self-assessment, it is possible to do it online through your tax gateway, or to write to HMRC with all the details of your contributions and the scheme you are paying into, in order to claim the extra tax relief.

‘It isn’t just tax relief on pension contributions that might need to be claimed, especially if you are a sophisticated or tax-efficient investor. Anyone who subscribed to Enterprise Investment Scheme or Venture Capital Trust share issues in the previous tax year, needs to remember to claim the 30% income tax relief available via their tax return.

‘While most will be aware of the need to do this, perhaps less understood is that people who opted into a VCT Dividend Reinvestment Plan, are also usually able to claim further 30% tax relief on their reinvested dividends each year as these typical involve the creation of new shares which are treated as additional contributions.’

NOTES

[1] Research from PensionBee (January 2023) suggested that:

• The number of eligible higher rate taxpayers not claiming beyond the basic rate of tax relief was around one million individuals a year between 2016/17 and 2018/19, reducing to 864,000 and 574,000 in 2019/20 and 2020/21 respectively.

• The number of eligible additional rate taxpayers not requesting a rebate was around 52,000 in 2016/17, down to 28,000 in 2020/21.

• Higher rate taxpayers missed out on £1.2 billion over the period (or an average of £245 million each tax year between 2016/17 and 2020/21)

• Additional rate taxpayers missed out on £89million over the period (£18 million each year between 2016/17 and 2020/21).

• In 2020/21 this equated to higher rate taxpayers missing out on an average of £425 each, and £527 in the case of additional rate taxpayers.

[2] Interactive Investor, January 2024

ENDS