Millions handing HMRC more tax than they need to pay | Personal Finance | Finance
Millions of workers could be needlessly handing over thousands of pounds to HMRC by failing to claim tax relief on pension contributions, a leading provider has warned.
Penfold says huge numbers of higher-rate taxpayers wrongly assume all pension tax relief is applied automatically – when in reality HMRC will not refund the extra unless savers actively claim it.
With the January 31 self-assessment deadline looming, experts say now is a crucial moment to check pension contributions and make sure no money is being left behind.
Chris Eastwood, chief executive of Penfold, said misunderstanding around how pension tax relief works is costing savers serious sums.
“We regularly see people paying higher-rate tax who assume all their pension tax relief is handled automatically,” he said.
“In many cases, it isn’t, and the result is money being left on the table that HMRC won’t pay back unless it’s claimed.”
For most personal pensions, providers automatically add basic-rate tax relief at 20%. But anyone paying 40% or 45% income tax is entitled to more – and that extra relief must usually be claimed by the individual.
This affects people who:
- Earn above the basic-rate threshold
- Pay into personal pensions
- Contribute to workplace schemes using the relief at source system
- Are not in salary sacrifice or net pay arrangements
HMRC figures show the scale of the issue is growing fast. Nearly 7.1 million people – almost one in five taxpayers – will pay higher-rate income tax in the current tax year, up 38.7% from 5.1 million just three years ago.
Around 1.23 million will pay the additional 45% rate. The surge is largely driven by frozen income tax thresholds, which have been locked since April 2021 and are due to remain unchanged until at least 2030/31.
Mr Eastwood said a higher-rate taxpayer making a large pension contribution could slash its real cost – but only if they claim the full relief.
“For someone paying 40% income tax, a £10,000 pension contribution could cost as little as £6,000 once all tax relief is claimed,” he said.
Without claiming the extra relief, savers simply pay more tax than necessary – and their retirement pot suffers as a result. Employees using salary sacrifice or net pay pension schemes usually receive full tax relief automatically, because contributions are taken from pay before tax is applied.
But many personal pensions and some workplace schemes use relief at source, where only basic-rate relief is added by default.
Mr Eastwood said understanding how your pension works is critical. If you are unsure which system your scheme uses, he said it is vital to check – especially before the January deadline.
While the January 31 self-assessment deadline does not force people to make new pension contributions, it is the cut-off for reporting income and claiming tax relief for the previous tax year.
Mr Eastwood said: “January is an important moment to review contributions made during the tax year and ensure any higher-rate relief is correctly claimed.
“Claiming pension tax relief isn’t about gaming the system. It’s about making sure people receive the tax benefit Parliament intended – and not paying more tax than they need to.”
How to claim higher-rate pension tax relief
The self-assessment deadline is 31 January. You may need to claim if you pay 40% or 45% income tax and your pension uses relief at source. If you complete a tax return, pension contributions are entered in the pensions section
If you don’t usually file a return, you may still be able to claim via HMRC or by contacting them directly You will need details of your contributions and pension provider
