Pensions tax relief could boost your retirement savings – are you claiming yours?
Saving into a pension for later life has many benefits, particularly as it is likely to provide the majority of your retirement income after you finish working.
An added benefit of saving into a pension rather than using another wrapper for your retirement savings is the tax relief that you can receive on your contributions. Tax relief means that the government tops up any deposits you make into your pension at your marginal rate, boosting your pot further.
But freedom of information requests to HMRC have uncovered that £1.3 billion in tax relief has gone unclaimed by higher- and additional-rate taxpayers over the past five years, a MoneyWeek report has revealed.
If you fall into one of these categories and you’re not claiming back your full tax relief, read on to learn why it’s so beneficial to do so and how to claim.
Tax relief is an effective way to boost your retirement savings
Tax relief is one of the ways the government incentivises you to save for retirement as it is essentially free cash going towards your retirement savings.
In 2020/21, higher-rate taxpayers missed out on an average of £425 each, and £527 in the case of additional-rate taxpayers, according the MoneyWeek report.
When you consider the impact of compound returns on your pension fund over time, these additional contributions could significantly boost your pot by the time you retire.
Most people automatically receive basic-rate tax relief on their contributions, so for every £80 you contribute to your pension, £100 is deposited because the government contributes an additional £20 to your pot.
This is taken from the Income Tax you paid on the salary that you used to make your contributions. So, instead of that tax going to HMRC, it goes back into your retirement savings.
If you are a basic-rate taxpayer, there is usually no need to take any action to receive this, as it will automatically be added into your pension pot for you.
Higher- and additional-rate taxpayers can claim tax relief at their marginal rate
Since you receive tax relief at your marginal rate, if you are a higher- or additional-rate taxpayer, you are eligible for a total of 40% or 45% tax relief on your contributions. For higher-rate taxpayers, this means that for every £60 you contribute to your pension (or £55 for additional-rate taxpayers), £100 is deposited.
However, to receive this, you need to actively claim it through your self-assessment online, or by writing to HMRC directly.
There are a few ways to claim your higher- or additional-rate pensions tax relief
When you make the claim, you should state the exact amount of pension contributions you have made in that tax year. This should be a gross calculation of your contributions plus the 20% tax relief that has automatically been applied.
You will receive the additional tax relief via one of the following:
A tax rebate at the end of the year
A reduction to your tax liability
A new tax code.
It’s also possible to claim relief dating back four tax years. So, in the 2023/24 tax year, you can claim for relief dating back to 2019/20.
There are 3 allowances you need to be aware of for pensions tax relief
When it comes to pensions tax relief, there are a few allowances that can affect how much you are eligible for.
It’s important to note that a Lifetime Allowance (LTA) previously limited the amount you could save into your pension over the course of your lifetime. The tax charges for exceeding this limit were removed for the 2023/24 tax year by chancellor Jeremy Hunt in his spring Budget in March. He has also announced a plan to abolish the LTA in the future.
Annual Allowance
Each year, the Annual Allowance limits the total amount that you can contribute to your pension (including employer contributions) and still receive tax relief on those contributions. For the 2023/24 tax year, the Annual Allowance has been increased to £60,000 or 100% of earnings, whichever is lower.
It is possible to “carry forward” any unused allowance from the previous three tax years.
Money Purchase Annual Allowance
The Money Purchase Annual Allowance (MPAA) limits the amount of money you can save tax-efficiently into your pension after you have started drawing flexibly from your defined contribution pension savings. So, it’s particularly important to be aware of this allowance if you are taking a phased retirement or if you have returned to work after retiring.
The chancellor has increased the MPAA to £10,000 for the 2023/24 tax year.
Tapered Annual Allowance
If you earn a high salary, you may be subject to the Tapered Annual Allowance (TAA).
From the 6 April 2023, for every £2 of “adjusted income” that you earn above the threshold of £260,000, your Annual Allowance reduces by £1. The minimum TAA for the 2023/24 tax year will be £10,000.
Get in touch
If you’d like to know more about how you can make the most of pensions tax relief to save for the retirement you want, we can help. Email theteam@fortitudefp.co.uk or call us on 01327 354321.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.