How claiming all your pension tax relief could help you retire earlier

How claiming all your pension tax relief could help you retire earlier

A recent article by the Telegraph explains that 80% of higher-rate taxpayers do not claim back all of their pension tax relief. It also reveals that more than half of those earning more than £150,000 do not claim their full relief.

When you consider that the additional relief could be as high as 25% of your pension contributions, it might be worth a significant amount. Little surprise that the article claims that 1 million 40% taxpayers needlessly miss out on an estimated £810 million of unclaimed tax relief each year.

If you’re not claiming all your pension tax relief, you could be reducing the potential growth of your retirement fund, which could affect your lifestyle later in life. Put another way, using all your tax relief to boost your pension pot might allow you to retire earlier than you thought.

So, read on to discover how you could claim your full pension relief as a higher-rate earner, and how you could then use this additional relief to boost your personal retirement fund.

While the article looks at private pensions, please remember that you might be able to claim additional relief with some workplace schemes as well. A financial planner will confirm whether this would be the case with your workplace scheme.

The government gives you money when you contribute to a private pension

When you make contributions to your personal pension pot or some workplace schemes, the government provides tax relief. This means that the money you would have paid to the government instead goes back into your retirement fund.

The amount of relief you get back depends on how much Income Tax you pay at your highest rate, and will be one of the following:

  • Basic-rate taxpayer: 20%
  • Higher-rate taxpayer: 40%
  • Additional-rate taxpayer: 45%

You do not need to do anything to claim basic-rate tax relief

Typically, the government will boost your pension by the basic rate of 20% without you needing to do anything. This is because your pension provider applies to HM Revenue & Customs for the tax rebate, which is then added to your contribution.

As such, as a basic-rate taxpayer every £100 you contribute to your pension actually costs you £80.

Higher earners have to claim some of the relief

If you are a higher- or additional-rate taxpayer, you can claim an additional 20% or 25% to make up the full 40% or 45% tax relief. To do this you use self-assessment.

To explain this, the Telegraph provides the following example.

If you’re a higher-rate taxpayer (40%) and contribute £8,000 into your retirement fund, your pension provider applies for basic-rate tax relief of 20%, which comes to £2,000. This means a total of £10,000 is added to your pension.

You would then need to claim the additional 20%, which again equates to £2,000, via self-assessment. Depending on your circumstances, when you do this the government will either give you a payment or adjust your tax code.

Claiming the additional relief could help boost your pension

If you claim the additional 20% or 25%, you could effectively put it into your pension. Doing so could increase the value of your pension pot, providing a better standard of living in retirement or allowing you to retire earlier.

Always speak to a financial planner to ensure this is right for you, and to make sure you do not breach your Annual Allowance and trigger a tax charge. The Annual Allowance is the amount you can put into your pension every year and receive tax relief on contributions.

In 2021, the allowance is up to £40,000 depending on how much you earn.

As the government will not put the additional relief directly into your pension, you will need to boost your contributions to match the value of the 20% or 25% additional relief. This also needs to be done prior to you receiving the tax rebate via self-assessment, which means that when you do receive the rebate it effectively gives you back the additional contributions you’ve made.

While it may sound complicated, a financial planner could help, making it more straightforward.

Get in touch

If you would like to discuss your pension tax relief or how to claim the additional amount, please get in touch. If you would also like to talk to us about ways you could add the additional relief to your pension contributions, we would be happy to help. Just contact us on 0800 434 6337.

Please note:

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.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.