Tax relief on pension contributions for higher rate taxpayers

Whether you’re employed or making personal pension contributions, higher rate taxpayers are entitled to tax relief on their pension contributions.

If you're in employment, you may be receiving your tax relief through your employer's payroll, but this isn’t always the case.

If you’re a higher rate taxpayer and haven't heard about tax relief on your pension contributions, read on to find out if you’re entitled to a tax refund.

Why isn’t your tax being calculated correctly?

If you’re paying into your employer’s pension scheme, there are two methods of receiving tax relief:

Net Pay Arrangement:  your pension contributions are being deducted before tax is calculated under payroll. This will mean the tax calculated is likely to be correct, and you won’t be entitled to any further tax relief.

The alternative method is called the ‘Relief at Source’. Here your pay is calculated as normal, and your net pension contribution is taken from your taxed pay. This contribution goes off to your pension pot, where HM Revenue & Customs top it up automatically with 20%. But if you’re a higher or additional rate payer, then you will be entitled to additional tax relief.

It is the pension scheme that dictates how tax relief is given; not your employer. Some schemes have the option to do both, so speak with your employer or your HR department to find out more.

If you’re making contributions into a private pension, additional tax relief is given by extending your basic rate band. This means that for every 80p of pension contributions you make, your basic rate band is extended by £1.

If you pay tax at 20%, no further relief is due to you. But for higher and additional rate taxpayers, this means they can shift some of their income out of 40% or 45% tax bracket, and instead pay just 20%, thereby receiving higher rate relief.

Your next steps

So if you’re a higher rate taxpayer making pension contributions into a pension scheme that operates Relief at Source, how do you go about reclaiming the tax relief?

Higher rate taxpayers are entitled to further tax relief on personal contributions paid to their personal pension scheme. As the pension scheme provider gives basic rate tax relief at source, the member claims any higher rate and additional rate tax relief from HMRC.

The extra tax relief available depends on the total personal contributions paid and the member’s total income. The extra tax relief due is given by extending the basic rate tax limit.

There are two ways for higher rate tax relief to be claimed on a personal contribution to a personal pension:

Through the annual self-assessment tax return

Higher rate tax relief can be claimed by entering the amount of gross personal contributions made to a personal pension scheme in the relevant part of the annual self-assessment form. Employer contributions should not be included in this amount.

Tax relief is given in one of three ways:

• A change to the tax code
• A tax rebate
• A reduction in tax already due to HMRC

By notifying the local tax office

People who don’t usually fill in an annual self-assessment form, or who don’t want to wait for their higher rate tax relief, can phone or write to their local tax office with details of:

• The personal pension scheme that personal contributions are being paid to,
• The date that the contributions start, and
• The gross amount of the personal contributions paid.

The local tax office will then arrange for their tax code to be changed so that higher rate relief is available throughout the year in which the contributions are being made. Any changes to the information given can be notified either by letter or through a self-assessment tax return at the end of the tax year.

If you’d like to claim tax relief but don't feel comfortable doing it yourself, speak with your local TaxAssist Accountant. Whether you choose to have the relief instantly or via a tax return, they'd be happy to help with your tax affairs.

Date published 16 Feb 2018

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.