What is “Tax Relief”?
Pensions tax relief is a term used to describe the tax treatment of the money that you save into a registered pension scheme.
How does it work?
Although we are usually taxed on our income, the Government’s approach to the money that we save for our retirement (into a pension) is to effectively delay the point at which we pay income tax. Rather than pay this tax now, we simply pay income tax on our retirement income instead.
If you save into a workplace pension through a salary sacrifice arrangement, this is done automatically through your employer’s payroll process (the money goes straight into your pension before any tax or National Insurance is deducted).
If you do not pay into your pension through a salary sacrifice system, then your pension contributions into your group personal pension, personal pension or self invested personal pension (SIPP) would be made using a system called “relief at source”. This means that the pensions provider claims back basic rate tax on your behalf.
With the basic rate being 20% (2020/21) the pension providers simply use this figure when making employee pension contributions. For example, a contribution of £100 is made up of a £80 payment from the individual, with the additional £20 claimed back on the individual’s behalf by the pension provider.
But what if you are not a 20% taxpayer?
Over four million people in England are higher or additional rate taxpayers (3,850,000 Higher rate taxpayers, 438,000 additional rate taxpayers).
Simply put, this means that over four million people are entitled to more than basic rate tax relief on their pension contributions. It could well be that some of these people could end up being higher or additional rate taxpayers in retirement, so not getting the correct rate of tax relief could mean that people are being overtaxed.
The picture gets more complicated when you also consider that an intermediate tax rate band exists in Scotland, with over 850,000 people (864,000 in 2019/20) paying tax at 21%.
Is saving into a pension worth it if I pay more than 20% tax?
Simply put, yes. Everyone can apply for the correct rate of pension tax relief – subject to personal contributions being within the allowances set out by the Government (usually 100% of income, capped at ‘£40,000 less employer contributions’ per year (2020/21), although this cap can be lower or higher in certain circumstances).
This additional relief could be provided in one of three ways:
- A tax code adjustment
- A tax rebate (refund)
- A reduction in the tax you already owe HMRC
The Telegraph estimate that savers could be missing out on £830,000,000 in unclaimed pensions tax relief!
What do I need to do, to get the pensions tax relief that I am entitled to?
You can claim this additional tax relief, on your self-assessment tax return. If you do not usually complete a self-assessment you can simply call or write to HMRC instead.
Is there anything that I can do for all the money I have paid into pensions over previous tax years?
Yes. You can claim back for previous years as well. However, there is a time limit of four years to claim back any tax relief from HMRC. A claim must be made within four years of the end of the tax year that a member is claiming for.
I find it a little confusing – could Brunsdon Financial help?
Yes – our team can help you to identify all pension contributions that have been made over the last few years, and help you claim what you are entitled to!
If you are an employer, and do not currently use salary sacrifice, it could be a good time to consider reviewing this decision. As well as making sure everyone gets the right level of tax relief, making contributions by salary sacrifice results in National Insurance contribution savings for employers and employees.
Source 1: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/812855/Table_2.1.pdf Source 2: https://www.gov.scot/binaries/content/documents/govscot/publications/factsheet/2018/12/scottish-income-tax-2019-2020/documents/analytical-note-on-impacts-on-income-levels-and-equality/analytical-note-on-impacts-on-income-levels-and-equality/govscot%3Adocument/Income%2BTax%2B-%2BDistributional%2BAnalysis%2B-%2BAnalytical%2BNote%2B-%2BFinal.pdf Source 3: https://www.telegraph.co.uk/money/consumer-affairs/savers-could-missing-830m-unclaimed-pension-tax-relief/ Any information provided in this article regarding tax treatment or legislation is based on our understanding of current UK legislation law, tax law and HM Revenue and Customs’ practice (June 2020), all of which may be subject to change. Brunsdon Financial is not responsible for the content of third party web sites.