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How to claim higher-rate tax relief on your pension
We tell you how to avoid becoming one of the 250,000 higher-rate taxpayers who miss out on tax relief on their pension contributions.
by Michelle McGagh on Apr 02, 2012 at 00:01
Taxpayers in Britain give away £2.45 billion to the taxman each year by failing to claim all the pension tax relief to which they are entitled.
Everyone who pays into a pension – either through their employer or personally – is entitled to tax relief on contributions, essentially free money from the government to encourage you to save more for your retirement. It is estimated that 250,000 higher-rate taxpayers do not claim back all of their relief because they mistakenly believe they receive it automatically.
But this isn't always the case – in many cases you must claim it. Unfortunately, you don’t get the money in your pocket. Instead, the government tops up your pension pot so you have more money in retirement.
How much do I get?
The amount of tax relief you get on your pension contributions depends on the top rate of income tax you pay.
Basic-rate taxpayers (who pay 20% income tax) automatically receive 20% tax relief on all contributions. The money gets paid into their pensions automatically, whether it is operated by their employer or if it is a personal pension. This is known as ‘relief at source’.
Although the contribution is said to be increased by 20%, the way the relief is calculated means you actually receive a 25% uplift in your contribution. For example, if you pay £80 into your pension every month, the government will add another £20 – making the total contribution worth £100.
Are the rules different for higher-rate taxpayers?
The rules are different for those paying the 40% higher-rate income tax, and also the 50% highest tax rate.
Those paying 40% income tax are entitled to 40% pensions tax relief on contributions, and 50% taxpayers are entitled to 50% tax relief – although this will drop to 45% in 2013/14 when the highest rate of income tax is cut for those earning £150,000 a year or over.
When 40% and 50% taxpayers contribute to a pension they automatically receive 20% tax relief on their contributions to personal pensions and employer pensions.
However, the rules around claiming the rest of the tax relief, either 20% or 30%, change for higher-rate taxpayers.
If you are contributing to an employer pension scheme which is a final-salary or occupational money purchase scheme, you do not have to worry about claiming the rest of the relief. Your pension pot will automatically receive tax relief of either 40% or 50%.
However, people in group stakeholder pension schemes, group personal pension schemes and personal pension schemes that they pay into privately will have to claim the 20% or 30% extra tax relief that you are owed from the government.
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