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Millions missing out on unclaimed pension tax relief

Joanna Faith
Written By:
Joanna Faith

More than a million higher earners are missing out on around £810m in unclaimed tax relief on their pension each year.

Eight in ten higher rate taxpayers fail to claim relief through their Self-Assessment tax return, according to analysis by online pension provider, PensionBee.

In addition, around 53 per cent of additional rate taxpayers fail to claim, inadvertently leaving tens of millions of pounds to the Treasury.

One of the benefits of saving into a pension is that you receive tax relief from the government. The amount you get depends on your income tax bracket – basic rate taxpayers get 20 per cent relief, higher rate taxpayers get 40 per cent, while additional rate taxpayers get 45 cent.

To claim tax relief on their pension contributions, eligible higher and additional rate taxpayers need to complete a Self-Assessment, even though they are employed.

Most basic rate taxpayers fall under the relief at source system for personal pensions, which requires pension providers to claim basic rate tax relief of 20 per cent on behalf of their customers and put it in their pensions.

Figures obtained via freedom of information requests to HMRC show that the number of taxpayers neglecting to claim beyond the basic rate of tax relief has remained consistent at around one million between 2016/17 and 2018/19 for higher rate taxpayers, while reducing from its three-year peak of 72,262 in 2017/18 to 58,690 in 2018/19 for additional rate taxpayers.

In 2018/19 alone, higher rate taxpayers left an estimated £756.2m in unclaimed tax relief on personal pensions, slightly down from £769.4m in 2017/18.

In the case of additional rate taxpayers, around £54.6m went unclaimed in 2018/19, compared to £60.5m in 2017/18.

Between 2016/17 and 2018/19 higher rate taxpayers failed to claim a total of £2.3bn while additional rate taxpayers overlooked a total of £164.7m.

Romi Savova, chief executive of PensionBee, said: “Tax relief is a vital incentive that encourages people to save efficiently towards their retirement and too many people continue to miss out on this crucial benefit.

“Research shows that consumers on lower incomes, and particularly women, do not receive any of the tax benefits that come with pension saving, because they are currently under the basic rate threshold. While at the other end of the spectrum, today’s analysis shows that millions of high earners are also missing out by not completing their Self-Assessment.

“The dual system is too complex and radical reform is long overdue. We’re calling on the Chancellor to scrap differential rates of tax relief, which are incredibly costly and complicated to understand, in favour of a system that truly rewards everyone for putting money away for their retirement. A universal rate of 25 per cent will level the pensions playing field and put a stop to consumers across all tax brackets missing out.”