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Pension contributions: How to claim higher rate tax relief

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Pension contributions: How to claim higher rate tax relief
Are you a higher-rate taxpayer? You could reclaim an extra 20% tax on your pension contributions for a total of 40% tax relief.
This is one of the best benefits of saving into a pension – getting tax relief on everything you pay in. However, many higher-rate taxpayers don’t realise this relief won’t happen automatically as you must claim it.
We reveal what you need to know about claiming higher-rate tax relief.

What is a higher rate of tax relief?

Tax relief is the principle that all income you pay into a pension scheme should be exempt from income tax.
However, as income tax is usually paid at source, which is 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 any pension contributions and paid into the fund. But if you are a higher-rate taxpayer, things are more complicated as you’ll pay 40% tax on all your income over the higher-rate threshold.
So, you can claim an extra 20% on this part of your income if you pay it into your pension, although you have to actively claim this via your self-assessment tax return or by contacting HMRC.
For example, if your annual earnings are £80,000, you pay the higher 40% rate tax on £30,000 of this. You put £35,000 into a private pension in that tax year, and a basic rate tax relief of 20% is automatically applied to the whole amount.
You can claim an extra 20% tax relief on £30,000, the amount you paid higher rate tax on, through your tax return or by contacting HMRC.
There is no extra relief on the remaining £5,000 you contributed to your pension.

How higher rate tax relief helps your pension

The extra tax relief offered to higher-rate taxpayers makes pension saving at this level up to twice as rewarding compared to saving on a basic-rate income.
Claiming all tax reliefs is a vital way of ensuring you get the most out of your pension contributions.
In practical terms, making a pension contribution with higher-rate tax relief is like getting a boost of around 66% on the amount you pay in.
Why 66% when the higher-rate tax is 40%? This is due to how percentages work. For instance, if you pay 40% tax on £100, it is reduced to £60.
But if you pay that £60 into a pension, the income tax is repaid – pushing it up to £100 again. And £60 turned into £100 is an increase of (roughly) 66%.
So in terms of value for money, higher-rate pension contributions are hard to beat.
Talk to your employer about how they make pension contributions for you, as under some schemes, such as salary sacrifice, you may receive your tax relief in a different way.
financial adviser can help if you have many options to consider about how to make pension contributions.
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How you can claim higher rate tax relief

Unlike basic rate tax relief, you need to claim higher rate tax relief on your pension contributions.
You can do this in two ways: through your self-assessment or by contacting HMRC.
To claim through your self-assessment, you will need to do so online. You should go to the relevant section of the online form and state the exact amount of your pension contributions.
This should be a gross calculation that includes your contributions and basic rate tax relief of 20%. Not doing this is one of the most common mistakes people make.
Your relief will either be supplied as a rebate at the end of the year, a reduction in your tax liability or a change to your tax code.
You can also write to HMRC. You can find the relevant address on your P60 or payslip, and the letter should outline exactly how much you have paid.
You will also need to provide personal details so you can receive tax relief. Bear in mind you will need to submit a new letter every time you alter your pension contributions or your salary changes.

Can I claim tax relief for previous years? 

You can make backdated claims for higher rate tax relief on your pension contributions, although there is a time limit as you can only claim back tax relief for the last four tax years.
If you have only been a higher-rate taxpayer for a short period, it should be simple to claim back the missing tax relief.

What are the limits on pension tax relief? 

There is a cap on the level of tax relief you can receive.
Your annual allowance, or the highest amount you can put into your pension each year, is £60,000 or 100% of your qualifying earnings, so this means you can only receive tax relief on this amount.
You need to be careful not to exceed this allowance, so keep a close eye on your pension contributions. You can use Unbiased’s pension calculator to help you stay on top of things.
There was a lifetime allowance, which meant you could draw a maximum of £1,073,100 from your pension without incurring extra charges, but this charge was stopped on 6 April 2023 and will be abolished this year. 

Can other people pay into my pension? What tax relief do I get? 

It is not only you and your employer who can pay into your pension pot. Other people can make pension contributions for you, and you will receive tax relief on these, too.
In these instances, you will still receive basic tax relief and would still need to claim the higher rate of tax relief on the gross contribution based on your circumstances.
The third party is not entitled to any tax relief on their contribution as it is counted as if you had made the contribution yourself.

Can I claim additional rate tax relief? 

If your taxable income is over £125,140, you’ll pay a tax rate of 45% on everything over this threshold.
So, you can claim additional tax relief on that amount – an extra 5%, to give you 45% tax relief on all contributions from your income over this threshold.
You’ll have to claim it back via your self-assessment form or by contacting HMRC.
It’s worth talking to a financial adviser about maximising the value of your pension through tax relief. Unbiased can help you quickly find a regulated adviser near you.
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