- If you are a higher-rate taxpayer, you could reclaim an additional 20% tax on your pension contributions, for a total of 40% tax relief.
- This is one of the biggest benefits of saving into a pension, getting tax reliefs on everything you pay in. Many higher-rate taxpayers don’t realise that this relief won’t happen automatically, you have to claim it.
What is higher rate tax relief?
- Tax relief is the principle that all the income you pay into a pension scheme should be exempt from income tax.
- Because income tax is usually paid at source (via PAYE if you’re an employee), this money is repaid to you on every pension contribution you make.
- Basic rate relief of 20% is automatically added to your pension contributions and paid directly into the fund.
- If you are a higher rate taxpayer, things are a little more complex. You’ll be paying 40% tax on all your income over the higher-rate threshold, so can claim an extra 20% on this part of your income if you pay it into your pension.
- However, you have to actively claim this money via your self-assessment tax return.
For example:
Your annual earnings are £80,000, so you pay the higher rate of 40% tax on £30,000 of this.
You put £35,000 into a private pension in that tax year. A basic rate tax relief of 20% is automatically applied on the whole amount.
You can claim an extra 20% tax relief on £30,000 (the amount you paid higher rate tax on) through your return or by writing to the tax office.
How does higher rate tax relief help my pension?
- The extra tax relief offered to higher rate taxpayers makes pension saving at this level up to twice as rewarding as saving on a basic-rate income.
- Claiming all available tax reliefs is an important way of ensuring you are getting the most value out of your pension contributions.
Can I claim tax relief for previous years?
- You can only claim back any tax relief for the last four tax years.
What are the limits on pension tax relief?
- Your annual allowance (or the highest amount you can put into your pension each year) is currently £60,000 or 100% of your qualifying earnings. This means you can only receive tax relief on this amount.
