If you’re a higher rate taxpayer, there is a fantastic opportunity for you to reclaim an additional 20% tax on your personal pension contributions. This results in a total tax relief of 40%…how could you say no to that!

This is one of the big advantages of saving into a pension as it allows you to benefit from tax relief on your contributions. However, many higher-rate taxpayers are unaware that this relief must be actively claimed. In this article, I will take you through the process of claiming higher rate tax relief to ensure you make the most of this opportunity.

Understanding Higher Rate Tax Relief

Tax relief is a principle that allows all income you contribute to a pension scheme to be exempt from income tax. Normally, income tax is deducted at source (via PAYE for employees), but this money is repaid to you for every pension contribution you make.

Basic rate relief of 20% is automatically added to your pension contributions and paid directly into the pension fund. Your pension provider will claim the 20% basic rate tax relief for you. This typically takes a couple of weeks (can be up to 10 weeks) to receive the tax reclaim from HMRC.

For higher rate taxpayers, the process is slightly more complex. You pay 40% tax on your income over the higher-rate threshold (currently £50,271) and can claim an extra 20% tax relief on this portion if you contribute it to your pension. However, you must actively claim this additional relief through your self-assessment tax return.

Please note, and this is an important point, that this is not the case if you are making contributions through your payroll either by salary sacrifice or the net pay method. Both of these methods will automatically give you higher rate tax relief. This article only applies for personal contributions made outside of payroll or where payroll contributions are made using relief at source. Employees should contact their payroll department to check which method is used.

The Benefits of Higher Rate Tax Relief for Your Pension

The additional tax relief offered to higher rate taxpayers makes pension saving at this level significantly more rewarding than saving on a basic-rate income. By claiming all available tax reliefs, you can ensure you derive the maximum value from your pension contributions. This table shows the total cost of a pension contribution and the benefit of tax relief for higher rate taxpayers:

Total Pension Contribution	Personal Pension Contribution	Government Contribution	Amount higher rate taxpayers can claim back	Effective cost for higher rate taxpayers
£5,000	£4,000	£1,000	£1,000	£3,000
£10,000	£8,000	£2,000	£2,000	£6,000
£20,000	£16,000	£4,000	£4,000	£12,000
£40,000	£32,000	£8,000	£8,000	£24,000
£60,000	£48,000	£12,000	£12,000	£36,000

How to Claim Higher Rate Tax Relief

Unlike basic rate tax relief, you must actively claim higher rate tax relief on your pension contributions. There are two ways to do this:

1. through your self-assessment
2. by contacting HMRC directly.

To claim via your self-assessment, access the relevant section of the online form and provide the exact amount of your pension contributions. This should be a gross calculation that includes your contributions and the basic rate tax relief of 20%. Failing to include this information is one of the most common mistakes individuals make. You will receive your relief either as a rebate at the end of the year, a reduction in your tax liability, or a change to your tax code.

Alternatively, you can write to your HMRC tax office. The relevant address can be found on your P60 or payslip, and your letter should specify the exact amount you have paid. Personal details must be provided to facilitate the tax relief process. Keep in mind that each time you modify your pension contributions or experience a change in salary, you will need to submit a new letter.

Can You Claim Tax Relief for Previous Years?

It is possible to make backdated claims for higher rate tax relief on your pension contributions, but there is a time limit. You can only claim tax relief for the last four tax years. If you have recently become a higher rate taxpayer, it should be relatively straightforward to claim back some of the previously missed tax relief.

Understanding the Limits of Pension Tax Relief

There are certain limits on the amount of tax relief you can receive. Your annual allowance is the maximum amount of pension contributions you can receive tax relief on each year. Currently this is the greater of your relevant UK earnings and £3,600, subject to a maximum of £60,000.

Third-Party Contributions and Tax Relief

Apart from you and your employer, others can also contribute to your pension pot. In these types of cases, you will still receive basic tax relief automatically. However, you will need to claim the higher rate tax relief on the gross contribution based on your own circumstances. You can find the address on your P60 or payslip, and your letter should specify the amount you have paid.

Claiming Additional Rate Tax Relief

If your taxable income exceeds £125,140, you will pay a tax rate of 45% on the amount over this threshold. You can claim additional tax relief on that amount which is an extra 5% to provide you with a total tax relief of 45% on all contributions from your income exceeding this threshold. As with higher rate tax relief, you will need to claim this relief via your self-assessment.

Conclusion

Pension contributions is a complex area of financial planning and it it’s essential to explore the options available to you. I suggest discussing the options around pension contributions with a financial planner  as they can provide valuable insights, especially if you have various options to consider regarding your pension contributions.

Any questions on pension contributions or planning for retirement?

Risk Warnings

• This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
• Your pension investment is a long-term investment, and its value and income may both decrease and increase, without any guarantee. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
• The levels and bases of taxation, and reliefs from taxation, are subject to change and their value depends on the individual circumstances of the investor.
• The interest rates at the time you take your benefits could also impact your pension income.
• The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
• The Financial Conduct Authority does not regulate advice on auto enrolment pensions.