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Many people who are members of pension schemes, such as NEST, are unaware that they are missing out on tax relief. Research shows there is almost £830 million of unclaimed pension tax relief each year!
If you have been a higher or additional rate taxpayer (paying 40% or 45% income tax) in any year where you have made pension contributions, you may be entitled to a tax reclaim.
You will be a higher rate taxpayer if you earn more than £50,270 in the current tax year (2020/21).
To find out if you are eligible, you need to understand what type of pension scheme you have been contributing to.
This example helps to demonstrate how two types of pension arrangements work in practice.
- Bob earns £60,000 per annum and contributes £500 per month to his pension
| Net Pay Arrangement | Relief at Source Arrangement | ||
| Gross monthly income | £5,000 | Gross monthly income | £5,000 |
| Less pension contribution | £500 | Pension contribution not deducted yet | £0 |
| Taxable monthly income | £4,500 | Taxable monthly income | £5,000 |
| Less tax at 40% | £1,800 | Less tax at 40% | £2,000 |
| Net pay | £2,700 | Net pay | £3,000 |
| Less pension contribution | £400 | ||
| Net pay after pension contribution | £2,600 | ||
| Basic rate tax relief added to pension | £100 | ||
| Bob needs to reclaim higher rate relief | £100 | ||
| Total pension contribution | £500 | Total pension contribution | £500 |
| Automatic Tax relief £500 x 40% | £200 | Total tax relief (including tax reclaim) | £200 |
Net Pay Arrangement
Under this approach, you employer will deduct your pension contribution from your gross pay (before tax). You will pay tax on the amount you have earned after your pension contribution has been taken effectively reducing the amount of tax you need to pay.
With a Net Pay arrangement, you will not see any tax relief being added to your pension and you will not need to reclaim any higher rate tax relief as you have received the tax relief automatically by not paying the tax in the first place.
Relief at Source Arrangement
Under this approach, your employer will deduct income tax from your total taxable earnings. They will then deduct 80% of your pension contribution from your net pay (after tax). Your pension provider will then claim the remaining 20% of your contribution from the government in the form of basic rate tax relief.
This is the type of arrangement that is commonly used for schemes like NEST and any contributions to a personal pensions or group personal pensions for auto-enrolment schemes.
If you have been a higher or additional rate taxpayer in any year where you have made pension contributions via a relief at source arrangement, you will be entitled to a tax reclaim if you have not already claimed this.
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.
Please note, the rates quoted are applicable for residents in England or Northern Ireland and rates vary for Scottish residents.
If you would like to find how you may be able to take advantage of government tax relief, please do not hesitate to contact us.
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