A large number of higher rate taxpayers making contributions into workplace pension schemes are collectively failing to claim £229m in pension tax relief.
Currently, money saved into pension pots qualifies for ‘tax relief’. Only basic-rate tax relief of 20% is added on to certain pensions automatically. Those who pay 40% or 45% tax have to fill in a tax return to claim back the additional relief.
A survey published by Prudential, highlighted that 26% of employees paying higher rate tax do not claim the higher rate income tax relief on their pension contributions, resulting in an estimated 185,000 higher rate tax payers failing to maximise their tax relief, with an average loss of £1,255 per annum. Furthermore, 15% (over 100,000) of higher rate tax payers are unsure if they are reclaiming the higher rate tax relief to which they are due.
The 2013 budget reduced the starting point for paying higher rate tax at 40% from £42,475 to £41,451, which means more savers could be eligible for pension tax relief.
Over time, the effects of the missing tax relief will multiple, meaning potential losses in retirement income. However, there is good news for some higher rate tax payers as it is possible to reclaim tax relief you have missed out on. If tax relief has not yet been reclaimed there is a 4 year time limit from the end of the relevant tax year for a reclaim to be made.