You’re owed £££’s via a credit/refund on your pension contributions
If you’re in employment and fall into the higher or additional rate (earning over £50,000 per year) tax bracket and you’re making contributions to an employment pension scheme then you could be owed a tax credit/refund on your pension contributions from HMRC which could be in the hundreds of £’s or more!
Pension contributions are usually made through a salary sacrifice arrangement to give you a taxable benefit. What does this mean? Take a look at your payslip, you should have your gross salary, deductions a subtotal and then tax. As the deductions come before tax is calculated you’re receiving a tax ‘saving’ on those deductions/contributions. This is great and a way for HMRC to incentivise employees to contribute to pensions to ensure they’re set for retirement.
The catch? When you move into the higher/additional rate tax bracket you start paying tax at 40% or 45% but the relief you’re earning might stay at 20% meaning you could claim the difference to 40% or 45% (the difference being 20% or 25%).
We’ve got a handy example directly from HMRC to explain how this might be substantial for you.
Example
You earn £60,000 in the 2020 to 2021 tax year and pay 40% tax on £10,000 (the amount above £50,000).
You put £15,000 into a private pension. You automatically get tax relief at source on the full £15,000, however this might be at 20% only.
You can claim an extra 20% tax relief on £10,000 (the same amount you paid higher rate tax on) through your Self Assessment tax return.
You do not get additional relief on the remaining £5,000 you put in your pension.
The saving in this scenario is £2,000!!!
How to check if you might be affected? It’s worth speaking to your employer and your pension scheme provider (think Aviva, Nest, Peoples Pension etc.) whether they know the rate at which you are receiving relief. If you find out that your relief is only at 20% but you’re being taxed at 40%/45% you may have a case to claim.
How to claim? You can claim via your self assessment tax return or by writing directly to HMRC. If you need help submitting a self assessment tax return or in checking if you’re affected, send us a query. We can do all the leg work for you and make sure your claim is compliant with HMRC rules.