Millions of pension savers across the UK are missing out on what experts describe as an "outstanding" financial perk, as frozen tax thresholds pull more people into paying a 40% charge to HM Revenue and Customs (HMRC).
The widespread oversight in pension tax relief
Financial advisers are raising the alarm that a significant number of people, particularly those who do not normally complete a self-assessment tax return, are forgetting to claim substantial rebates they are owed. Gary Smith, a financial planning partner and retirement specialist at wealth management firm Evelyn Partners, emphasised the scale of the issue.
"Pension tax relief is the outstanding benefit of the UK’s private pension saving system," said Mr Smith. "So it's important that savers who take up this opportunity don’t shoot themselves in the foot by neglecting to collect the great benefits on offer."
He explained that many individuals are so focused on ensuring they do not under-report income to HMRC that they overlook the chance to claim money back. Others, who have no other reason to interact with the self-assessment system, may be unaware they need to do so specifically for this purpose.
Who needs to claim and how the system works
The problem primarily affects those paying into "relief at source" pension schemes or personal pensions like a Self-Invested Personal Pension (SIPP). Contributions to these are made from net pay, after income tax has been deducted.
Basic rate tax relief of 20% is added automatically by the pension provider. However, if you have paid income tax at the higher rate of 40% or the additional rate of 45%, you must proactively claim back the extra 20% or 25% in relief from HMRC.
Mr Smith highlighted a potential point of confusion: "It might be that some employees are misled by the term 'relief at source', which could be taken as implying that all relief is taken care of at the point of contribution. Rather, it is in 'net pay' or salary sacrifice systems that relief at all levels is added automatically."
Steps savers must take now
As a crucial first step, employees are urged to check what type of system their workplace pension uses. They can ask their HR department or pension provider directly if all eligible tax relief has been applied to their contributions.
All personal pension savers, whether with a major insurer, a stakeholder pension, or a SIPP, should assume they need to take action to claim back higher or additional rate tax relief. It is possible to claim this relief without completing a full tax return.
By not claiming, higher and additional rate taxpayers are sacrificing thousands of pounds. This loss is compounded by years of frozen tax thresholds, which have drawn millions more people into higher tax brackets.
Mr Smith concluded with a stark warning: at a time when financial pressures are acute, failing to secure this rebate represents a significant and avoidable financial setback for savers diligently preparing for retirement.
