Pension tax relief: Why it is vital your clients don’t forget to claim what they are owed

One of the most important aspects of financial planning for many clients is to save enough over their working lives to ensure they can afford a comfortable retirement. 

For the majority of people, the most tax-efficient way to save for retirement is through a pension. 

While many pension savers know this to be true, even with this knowledge, higher- and additional-rate taxpayers end up leaving millions of pounds of tax relief unclaimed.

In fact, according to a MoneyWeek report, over five years, unclaimed tax relief adds up to a massive £1.3 billion. Details revealed by HMRC suggest that each year: 

  • Higher-rate taxpayers left an average of £245 million in unclaimed tax relief 
  • Additional-rate taxpayers left approximately £18 million unclaimed.

That’s a lot of money to leave on the table. And, chances are, your clients could be among the many higher earners missing out on valuable pension tax relief.

Keep reading to find out more about how pension tax relief works, and why it’s so important for your clients to claim the relief they are entitled to. 

Pension tax relief in a nutshell

When you contribute to a pension, a portion of the money that would have gone to the government as tax is added to your pension pot instead. This is called “tax relief”.

Most basic-rate taxpayers contributing to a pension benefit from “relief at source”. This means that pension providers claim basic-rate tax relief of 20% on behalf of their customers and put it in their pensions.

However, if you’re a higher- or additional-rate taxpayer, you need to claim the additional 20% or 25% relief from HMRC. You will normally do this through your annual self-assessment – even if you’re employed.

The chart below illustrates how a £100 pension contribution is split between what your client pays alongside the amount of tax relief.

Source: Standard Life

Extrapolate this out and for higher-rate taxpayers, it means that every £1,000 contribution made to their pension only costs £600, with the rest made up of tax relief.

As we saw from the alarming figures above, claiming this additional tax relief is hugely beneficial. Yet a lot of higher- and additional-rate taxpayers fail to claim the extra tax relief they are owed, simply because they are unaware of how the system works.

How your high-earning clients should claim their pension tax relief

Your higher-earning clients need to make sure that they state the exact amount of their pension contributions when they file their self-assessment return each year. 

This should be a gross calculation that includes their contributions and the basic-rate tax relief of 20%.

Clients will receive tax relief as either:

  • A change to their tax code
  • A rebate at the end of the year
  • A reduction in their tax liability.

As an alternative to using a self-assessment form, clients can write to their tax office outlining the pension contributions they have paid. 

Also, bear in mind that the amount of tax relief clients are due could change if they adjust their pension payments or if their salary changes.

Don’t miss the opportunity to catch up on missed tax relief

An Annual Allowance applies to anyone contributing to a pension. For the 2023/24 tax year, you can receive tax relief on pension payments up to £60,000 or your total salary – whichever is lower. 

While you can contribute more than this to your pension, you won’t receive the tax relief, and may face a tax charge.

If your clients didn’t realise they needed to claim additional tax relief, they could still claim back any tax relief they’ve previously missed out on – but only for the last four tax years.

Additional complexities for additional-rate taxpayers

For clients who pay additional-rate tax, the amount of tax relief they can receive may be affected by the Tapered Annual Allowance.

As explained above, in the 2023/24 tax year, the Annual Allowance restricts the tax-efficient contributions you can make to your pension to £60,000.

However, if a client’s “threshold income” is more than £200,000 in a year, or their “adjusted income” (threshold income plus all pension contributions) is more than £260,000, they may be affected by the taper.

If so, their Annual Allowance is reduced by £1 for every £2 of adjusted income they earn above £260,000. 

The minimum this can taper to is £10,000 (2023/24). 

If a client’s adjusted income for the 2023/24 tax year is £290,000, exceeding the minimum limit by £30,000, their Annual Allowance would fall £15,000 (half of £30,000), to £45,000.

We can give your clients bespoke advice to ensure they aren’t leaving money on the table

This can be a lot of information to take in and applying it to your clients on an individual basis could be hard work. 

If your clients want to ensure that they are benefiting from all the possible tax efficiency when contributing to their pensions, we can help.

We work with clients to help them understand all their options and create a bespoke retirement plan to enable them to enjoy a comfortable retirement.

Get in touch

Our door is always open to welcome new clients and build long-term relationships. If we sound like the right fit for your clients, get in touch today.

Email or call 0345 505 3500.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.