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Are you missing out on free pension money?
Higher-rate taxpayers are failing to pay into pensions and missing out on money from the government in the form of pensions tax relief.
by Michelle McGagh on Aug 17, 2012 at 00:01
Higher-rate taxpayers are missing out on £438 million a year as one in four fails to contribute to a pension and take advantage of pensions tax relief.
A total of 216,000 employees do not contribute to pension schemes, which means they cannot claim pensions tax relief.
Everyone who contributes to a pension is entitled to tax-relief on contributions – 40% in the case of higher-rate taxpayers.
How the tax relief works
This is essentially free money from the government to encourage you to save. The tax relief you receive doesn’t go back into your pocket, but is added to your pension pot, giving a boost to your contributions.
According to the Prudential, higher-rate taxpayers miss out on £438 million a year in free money by failing to pay into a pension. An average higher-rate taxpayer contributing £425 a month into a pension fund receives basic tax relief of 20%, or £85 a month, directly into their pension. They can also claim a further 20% from the government, another £85 per month or £170 in all a month in extra contributions.
Despite this incentive, and the average higher-rate salary topping £58,541, people are still failing to save.
A survey of those earning between £42,275 and £149,999 revealed 21% do not contribute because they feel they cannot afford to. Another 13% said they do not see the point of saving for retirement, and 17% don’t know why they don’t save.
Matthew Stephens, Prudential tax expert, said: 'Pension saving offers valuable tax reliefs to all workers and particularly to higher-rate taxpayers. Basic rate 20% tax relief is available at source plus up to an extra 20% from HM Revenue & Customs for higher-rate taxpayers. Turning down what is effectively free money simply does not make sense.
‘It is worrying that so many higher-rate taxpayers say they cannot afford to save into a pension despite earning healthy salaries. The good news is that it is never too late to take action on saving for retirement.’
To find out more about pensions and pensions tax relief, check out these guides from The Lolly:
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- How to claim higher-rate tax relief on your pension
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