Around 800,000 higher earners are failing to claim pension tax relief they are entitled to with the annual cost running to more than £1bn.
According to Freedom of Information data obtained by former pensions minister Steve Webb, now partner at LCP, shows that in 2023/24, 6.8m people contributed to pensions using the relief at source (RAS) system, where basic rate tax relief is added automatically.
But higher- and additional-rate taxpayers do not receive the extra relief automatically and must claim it themselves from HMRC, worth 20 per cent for higher rate and 25 per cent for additional rate taxpayers, usually through self-assessment.
HMRC figures show that between 2023-24 16.4 per cent of taxpayers paid higher rate tax and 2.5 per cent paid the additional rate. More than 1.2m higher and additional rate taxpayers would therefore be expected to reclaim pension contributions but in practice, just 316,000 declared RAS contributions on their tax returns.
The average gross contribution declared was £8,782, resulting in unclaimed relief of £1,756 for a higher rate taxpayer and £2,195 for an additional rate taxpayer. Some individuals reclaim relief through tax code adjustments, but Webb says the figures are likely to understate the problem, as higher earners typically contribute more.
The problem is expected to continue as fiscal drag pushes more people into higher tax bands, with higher and additional rate taxpayers increasing from 6.9m in 2023-24 to 8.3m in 2025-26.
Webb urges savers to check their 2024-25 tax returns and make backdated claims for up to four years if relief has been missed.
LCP partner at pension consultants Steve Webb says: “With more and more people being dragged into higher rates of income tax, it is increasingly important that they claim all the tax relief to which they are entitled. Anyone saving into a personal pension or other ‘relief at source’ scheme can get higher rate relief – but only if they claim it. When filling in your tax return it is vital not to ignore the box for personal pension contributions but to enter the gross amount that went in to your pension. This should trigger a tax refund worth an average of over £1,700 for higher rate taxpayers and over £2,000 for additional rate taxpayers”
