Employee Pensions – The Most Common Unclaimed Tax Relief?

In the long list of tax reliefs that seems to be most widely misunderstood and unclaimed, employee pension contributions must be right at the top.

My colleagues and I are always amazed by the number of people who are unaware that they may need to apply to HMRC to get the tax repayment they are due. This can come as a nice surprise to individuals who may have not claimed the relief for several years and are therefore due a reasonably substantial repayment.

Our hunch that it is widely unclaimed was backed up when a freedom of information request last year showed that a staggering £1.3bn of pension tax relief had been unclaimed by individuals over the five tax years-ending 2020/21. 

So why is it unclaimed? And are you one of the individuals not claiming what you are due?

Two types of employee contributions

In the UK, there are two ways in which your employee pension contributions are usually made:

1. Contributions are made gross before tax; or
2. Contributions are made net after tax

If you are in bucket 1, you are already getting full relief on your pensions, and you can stop reading now.

If you are in bucket 2, HMRC only give you relief at 20% of the gross contributions. If you are a higher or additional rate taxpayer (i.e. taxable income over £50,270), you should be due a repayment.

How do you work out if my contributions are made net?

1. Check your payslip – if your pension contributions are coming out of your net pay after tax, then your contributions are made net.
2. Ask for a download of your employee pension contributions from your pension provider – if “relief” is being given on the employee pension contribution then your contributions are being made net.

If you have a NEST pension (which they claim one in three working-age people in the UK have) then it is highly likely your contributions are being made net.

If you are unsure, contact your relevant advisor at WSM who should be able to assist.

How much could you be due?

The rules on pensions are complex and the tax position of each taxpayer will depend on their individual circumstances.

However, a higher rate taxpayer will generally be due 20% of their grossed-up employee contributions. For an employee making net contributions of £5,000 into pension scheme during the year, HMRC will already gross up your contributions to £6,250. A repayment of 20% of this figure would equate to £1,250.

An additional rate taxpayer would be due 25% of the grossed-up employee contributions – the repayment would be £1,562.50 based on £5,000 net contributions.

If you are an individual who happens to earn £100k – £125k, and therefore have a marginal tax rate of 60%, you could be due a repayment of up to £2,500.

How many years can I claim?

Claims can be made within four years of the end of the relevant tax year in which the contributions were made.

How do I make a claim?

The easiest way to make a claim is via your self-assessment tax return. However, for many higher rate taxpayers, you may not have a requirement to file a return.

Claims can be made outside of the self-assessment system by writing to HMRC and detailing the contributions that have been made.

If you would like assistance with this process, WSM would be delighted to help.