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Are you claiming the full pension relief on your employment income?

10 March 2022
Simon Laurie
Reducing Tax, Payroll, People

Payments made into a pension scheme qualify for a very valuable tax relief at your top rate of income tax. Not only will the monies in the pension fund be available to provide you with an annual income for your retirement but the fund itself falls outside your estate for inheritance tax purposes and is usually available to pass to your family on death.

For salaried people pension relief is generally claimed via your employment. However, if you pay Income Tax at a rate above 20% you may not be getting the full relief for your employee contributions.

If your pension provider claims the first 20% for you, otherwise known as ‘relief at source’, or your pension scheme is not set up for automatic tax relief then a claim can be made to HMRC on your Self-Assessment tax return or by calling/writing to HMRC for the money you put into a private pension of:

  • 20% up to the amount of any income you have paid 40% tax on
  • 25% up to the amount of any income you have paid 45% tax on

As an example, NEST Pensions is a popular scheme following the introduction of Auto Enrolment and more often than not employees’ contributions are set to a basic rate relief of 20%. If your employee contribution is 5% per month, the contribution on the payslip is only 4% on pensionable earnings (5% x (100%-20%)). The other 1% (20% of 5% pension contribution) is paid into the pension pot by the government, therefore providing you with 20% pension relief.

Say you earn £65,000 in the 2021/22 tax year and pay 40% tax on £14,730 (income over and above the higher rate limit of £50,270). You contribute £18,000 into a private pension which will automatically get basic rate tax relief at source. The additional 20% higher rate tax relief on £14,730 would need to be claimed by the methods listed above.

You do not get additional relief on the remaining £3,270 you contribute, as this falls within your basic rate band.

We commonly find this is not a well-known piece of legislation and that many employees are overpaying tax each and every tax year. As mentioned above the ONLY way to make a claim for the relief is via a tax return or by calling HMRC!

You may also want to take the opportunity to review your pension position to see if there are additional contributions you can make in the current tax year to obtain the maximum tax relief available. Everyone has an annual allowance (the maximum amount that can be contributed to your pension scheme per tax year by you and/or your employer). It is usually £40,000 per annum but can be less if your earnings are very high. If not fully utilised any unused amount can be carried forward for up to three years, but after then it will be lost. So any unused allowance for the 2018/19 tax year will be lost if not used by 5 April 2022 (you must use up all of your current year’s allowance before you can use the brought forward amount).

If you are a client of Friend & Grant and want advice on pension planning either contact your accounts manager or a member of our tax team who will be happy to help you.

The content in this blog is correct as at 10 March 2022 See terms and conditions.

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