Posted on June 19th, 2014 | Categories - Pensions
Research from the Prudential found:
- Higher rate taxpayers are missing out on £225 million in tax-relief by not paying into a pension
- Astonishingly, 10% of higher rate taxpayers make no pension contributions at all
- For those higher rate taxpayers who do pay into a pension the average annual contribution is £6,276, way below the maximum allowable amount of £40,000 per year
- 15% of higher rate taxpayers do not know if they are receiving tax-relief
A very quick guide to pension tax-relief
Tax-relief is one of the key benefits of paying into a pension, here’s our (very) quick guide:
- Everyone, even non-taxpayers, get basic rate tax-relief on pension contributions
- This means for every £80 of contribution you make, an additional £20 is immediately added by HMRC (Her Majesty’s Revenue & Customs), to make the gross contribution £100
- Higher rate taxpayers can claim back a further 20% through their tax return, making the true cost of paying £100 into a pension, just £60
- The maximum amount which can be paid into a pension, and qualify for tax-relief, is £3,600 gross for non-taxpayers or for basic and higher rate taxpayers an amount equal to your salary, capped at £40,000 each year
Paying into a pension already? Make sure you claim what’s yours
Higher rate taxpayers, who are members of occupational pension schemes, automatically receive the full amount of tax-relief.
The same does not apply for members of Personal Pensions, Stakeholder Pensions, Group Personal Pensions or Self-Invested Personal Pensions (SIPPs) where only basic rate tax-relief (20%) is given automatically, the rest has to be claimed annually through a tax return.
If you have not claimed the higher rate tax-relief due, you should take action immediately. HMRC only allow a maximum of four years missing tax-relief to be claimed.
“It doesn’t apply to me; I’m nowhere near paying higher rate tax”
Are you sure about that? You might be closer than you think.
In the current tax-year the Personal Allowance, the amount you can earn before you start to pay tax, is £10,000. The basic rate tax band extends to the next £31,865 of earnings, which means that if you earn more than £41,865 each year, you are a higher rate taxpayer.
Anyone earning over this amount and paying into a pension, should make sure they are claiming higher rate tax-relief. For most people, this will mean completing a tax return and claiming the extra relief.
The Prudential figures show the average amount claimed back in higher rate relief is £2,510 each year; not to be sniffed at and certainly worth investing a few hours in completing a tax return.
Why Automatic Enrolment isn’t the answer
If you are employed you will be automatically enrolled into a pension over the next few years. In fact, if you work for a large employer this may have already happened.
But this isn’t the answer to claiming higher rate tax-relief. In fact it probably isn’t the whole answer to providing a comfortable retirement.
Not everyone realises that minimum contributions under Automatic Enrolment are only based on the band of earnings between £5,772 and £41,865. Therefore, if you are a higher rate taxpayer, contributions may not based on your full salary.
Furthermore, although they will rise to 8% by 2018, contributions can start at just 2% of the band of earnings, 1% from you and 1% from your employer.
So, only a small percentage will be paid into your pension and they may not be based on your whole salary; hardly a recipe for a comfortable retirement!
For most people additional contributions will be needed, which means claiming the higher rate tax-relief which is rightfully yours.
Claim it or lose it
Tax-relief is one of the main benefits of paying into a pension and sets it apart from other options, such as ISAs (Individual Savings Accounts).
Most people can’t afford to miss out, after all, very few people are saving enough for retirement.
Our team of advisers are here to help you work out if you are claiming the right amount; call them today on 0115 933 8433 or email firstname.lastname@example.org