Comprehensive Guide to Claiming Tax Relief on Pension Contributions

If you are a higher rate taxpayer and you don’t know how to claim higher rate tax relief on pension contributions, you will lose out on maximising your savings for retirement. It’s not something you can afford to do. But all is not lost. Once you know about claiming higher rate tax relief on pension contributions, you can use any unused allowances from the previous three years starting with the 2021/2022 tax year and carry them forward to catch up on any shortfall.

Understanding higher rate tax relief on pensions

What is tax relief on pension contributions and why is it applied? The answer is that the UK government encourages its citizens to save for their retirement by giving them tax relief on contributions to their private pensions. Most pension scheme contributions are paid via the ‘relief at source’ system. It means that you pay pension contributions after income tax has been deducted from your salary. If you are a basic rate taxpayer, this means you will have 20% income tax deducted.

The government’s pension tax relief system incentivises you to contribute to your private pension pot by returning the 20% tax you’ve paid on your contributions. It works like this.

Let’s say you made a £100 contribution to your pension pot. Under the ‘relief at source’ system, you’ve already paid tax on this sum. If you hadn’t, your contribution would have been £125. As an incentive to encourage you to make contributions, the government returns this £25 to your pension provider, who then adds it to your pension pot.

Eligibility criteria for higher rate tax relief

Before we get into the subject of how to claim higher rate tax relief on pension contributions if you’re a higher or additional rate taxpayer, let’s take a look at the eligibility criteria.

The government also wants to incentivise higher earners, those classed as higher or additional rate taxpayers, to contribute more to their pension pots, which is why pension tax relief is linked to income tax bands. Higher rate taxpayers are entitled to extra tax relief on pension contributions (40%) when their income is above £50,270 per annum. Additional rate taxpayers are entitled to additional tax relief on pension contributions (45%) when their income is above £124,140 per annum.

Examples of the differences between basic, higher, and additional rate tax relief

You know how tax relief works for basic tax payers (it’s a flat  20%). But how does it work for higher earners? Here is an example of how to claim higher rate tax relief on pension contributions if you are a higher rate taxpayer.

• Your annual salary is £60,000.
• You want to achieve pension contributions totalling £3,000.
• You personally contribute £2,400.
• The government adds 20%, totalling £600.
• Additional amount you can claim back – £600

In this example, the effective cost to you for your contributions is £1,800. (£3,000 less £600 initial tax relief, minus a further £600 for higher rate tax relief), While the initial tax relief is part of the automatic ‘relief at source’ system, the higher rate £600 relief has to be claimed by you by completing a self-assessment tax return.

Here is a tax relief on pension contributions example for an additional rate taxpayer.

• Your annual salary is £150,000.
• You want to achieve pension contributions totalling £10,000.
• You personally contribute £6,000.
• The government adds 20%, totalling £2,000.
• Additional amount you can claim back – £2,500

In this example, the effective cost to you for your contributions is £5,000. (£10,000 less £2,000 initial tax relief, minus a further £2,500 for additional rate tax relief), While the initial tax relief is part of the automatic ‘relief at source’ system, the additional rate of £2,500 relief has to be claimed by you by completing a self-assessment tax return.

The same criteria applies to all types of pensions, including stakeholder pensions, and workplace pensions, It’s also the same for when claiming extra tax relief on SIPPs.

The calculation for the amount of tax relief available is quite complicated. There are several components that have to be included, such as qualifying earnings. You might find it easier to use a tax relief on pension contributions calculator like the one of the TaxScouts website.

Step-by-step instructions on how to claim higher rate tax relief on pension contributions

As already mentioned, if you are a higher or additional rate taxpayer, in order to claim your extra tax relief, over and above the basic rate tax relief you will have to complete an SA100 self-assessment tax return every year. These are the steps to follow:

• If you’ve not filed a self-assessment tax return before, the first thing you’ll need to do is to register for self-assessment.
• Once you’ve received or downloaded your SA100, you can make use of the HMRC’s Tax Return notes document to help with completing the form.
• When claiming extra tax relief on pension contributions, go to the appropriate section of the SA100
• Enter the exact amount of your pension contributions. This means the gross amount which includes the contributions made and the basic 20% tax relief figure

Common mistakes when claiming pension contribution tax relief

Figuring out how to claim higher rate tax relief on pension contributions via the SA100 self-assessment tax return form can be quite daunting. The common mistakes to avoid when claiming extra pension contributions tax relief include:

• Not using the right figures. You must quote the gross amount and this includes all contributions made plus the 20% basic tax relief amount.
• Trying to claim tax relief on employer pension contributions.
• Forgetting about the 3-year carry forward allowance
• Missing the deadlines.

Important deadlines for claiming extra tax relief on pensions

Everything relating to HMRC, taxes and tax relief works around the tax year, which commences on the 6^th of April and ends 12 months later on the 5^th of April. If you are claiming extra tax relief on your pension contributions, it is important to bear this in mind.

How higher rate tax relief affects your pension savings

As you can see from the examples shown earlier, the sums of money involved with higher rate tax relief are significant. The earlier they are added to your pension pot, the more time compound interest has to get to work, and the more you will have in your pension pot on your retirement. In other words, getting to grips with claiming extra tax relief if you are a higher or additional taxpayer should be an important part of your retirement planning.

Don’t forget your pension allowance

As from the 6^th of April 2024, the pension allowance, dictating the cap on how much you can contribute per tax year to your pensions while expecting tax relief, was raised from £40k to £60k. If you contribute more than £60k per year to your pensions, you will not get any tax relief on the excess amount, and you might face a penalty charge from HMRC.

If, in the previous three years, (the earliest from the current 2024/25 tax year, being the 2021/22 tax year), you have any unused pension allowance, you can carry forward any unused amounts and add them to the current year’s £60k allowance. You can do this without having to notify HMRC.

The abolishment of the lifetime allowance

Before the abolishment of the lifetime allowance (LTA) in April 2024, you were only allowed to save a maximum £1.0731 million without incurring a tax charge. This was a worry for high earners who had solved the problem of how to claim higher rate tax relief on pension contributions, and who, as a result, were able to contribute large amounts of money to their pension funds. Thanks to the abolishment, that problem no longer exists.

Don’t forget that pension income is taxable

When you are thinking about how much you need to retire, it’s important not to forget about the tax man. He will claim his pound of flesh (after the 25% tax-free allowance) on pension income according to the income tax bracket your year’s income puts you into. Some high earners seek out tax free alternatives such as stocks and shares ISAs. It can be a good way of investing any excess to your annual pension allowance, or even gives you an opportunity to split your savings. The only thing you have to bear in mind is that the value of stock market investments can fall as well as rise.