Millions of staff could be needlessly handing over hundreds of kilos to HMRC by failing to claim tax reduction on pension contributions, a main supplier has warned.
Penfold says large numbers of higher-rate taxpayers wrongly assume all pension tax reduction is utilized mechanically – when in actuality HMRC will not refund the additional unless savers actively claim it.
With the January 31 self-assessment deadline looming, consultants say now is a essential second to examine pension contributions and make sure no money is being left behind.
Chris Eastwood, chief government of Penfold, said misunderstanding around how pension tax reduction works is costing savers severe sums.
“We regularly see people paying higher-rate tax who assume all their pension tax relief is handled automatically,” he said.
“In many cases, it isn’t, and the result is money being left on the table that HMRC won’t pay back unless it’s claimed.”
For most personal pensions, suppliers mechanically add basic-rate tax reduction at 20%. But anyone paying 40% or 45% income tax is entitled to more – and that additional reduction must normally be claimed by the particular person.
This impacts people who:
- Earn above the basic-rate threshold
- Pay into personal pensions
- Contribute to office schemes utilizing the reduction at source system
- Are not in wage sacrifice or internet pay preparations
HMRC figures show the scale of the problem is growing fast. Nearly 7.1 million people – virtually one in 5 taxpayers – will pay higher-rate income tax in the present tax yr, up 38.7% from 5.1 million just three years in the past.
Around 1.23 million will pay the further 45% fee. The surge is largely pushed by frozen income tax thresholds, which have been locked since April 2021 and are due to stay unchanged until at least 2030/31.
Mr Eastwood said a higher-rate taxpayer making a giant pension contribution could slash its actual value – but only if they claim the full reduction.
“For someone paying 40% income tax, a £10,000 pension contribution could cost as little as £6,000 once all tax relief is claimed,” he said.
Without claiming the additional reduction, savers merely pay more tax than essential – and their retirement pot suffers as a outcome. Employees utilizing wage sacrifice or internet pay pension schemes normally obtain full tax reduction mechanically, because contributions are taken from pay before tax is utilized.
But many personal pensions and some office schemes use reduction at source, where only basic-rate reduction is added by default.
Mr Eastwood said understanding how your pension works is essential. If you are not sure which system your scheme makes use of, he said it is important to examine – particularly before the January deadline.
While the January 31 self-assessment deadline does not power people to make new pension contributions, it is the cut-off for reporting income and claiming tax reduction for the earlier tax yr.
Mr Eastwood said: “January is an important moment to review contributions made during the tax year and ensure any higher-rate relief is correctly claimed.
“Claiming pension tax relief isn’t about gaming the system. It’s about making sure people receive the tax benefit Parliament intended – and not paying more tax than they need to.”
How to claim higher-rate pension tax reduction
The self-assessment deadline is 31 January. You may need to claim if you pay 40% or 45% income tax and your pension makes use of reduction at source. If you full a tax return, pension contributions are entered in the pensions part
If you don’t normally file a return, you may still be ready to claim via HMRC or by contacting them straight You will need particulars of your contributions and pension supplier
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