14 Jul 2022

Claiming Workplace Pension Scheme Tax Relief

Saving for retirement is a crucial part of financial planning, and although there are many ways to save – including pensions, property and investments – one of the most effective methods is an employer’s workplace pension scheme. This is due to the company contribution (minimum of 3%) which is basically ‘free money’.

Pensions are an incredibly tax-efficient way of saving, with the government incentive of Income Tax relief which is applied to personal contributions paid into a pension.  Typically, individuals receive basic rate Income Tax relief at source at a rate of 20%, meaning a £100 deduction from salary is increased to £125 when invested by the respective pension provider.  This is known as Relief at Source and is the most common approach used for personal payments into workplace pensions and personal pension plans.

What is often missed is the ability for Higher or Additional rate taxpayers to claim additional Income Tax relief to 40% or 45%.  Typically, individuals start to pay 40% Income Tax once income exceeds £50,271 (2022/23 tax year), however, it may be lower depending on the respective PAYE tax code.

In our experience at BM Connect and Integrity365, a fellow Beavis Morgan group company, most higher rate taxpayers are not aware they can claim this additional relief, potentially missing out on hundreds, – or possibly thousands – of pounds, depending on how much has been paid into a pension.

If we take an example of a higher rate taxpayer contributing £250 per month gross into their pension, they receive £50 Income Tax Relief at source and can claim an additional £50 pm via HMRC. This is a significant amount when you look at this over the lifetime of an individual saving.

There are two main options when it comes to claiming tax relief:

  • Include personal payments on an annual Tax Return/Self-Assessment if completed
  • Contact HMRC to notify HMRC of the monthly payment into the pension

Typically, HMRC will look to amend an individuals PAYE tax code to provide the additional relief at source.

If you have not claimed additional relief and have previously paid into a pension, you can make a backdated claim to HMRC who typically allow you to go back up to 4 full tax years.  This is a very worthwhile exercise to receive a tax rebate which is paid to your bank account and not your pension.  You will need to obtain a statement of personal contributions paid for the period you have been funding the pension from your pension provider(s) and been a higher or additional rate taxpayer.

It is worth noting that not all workplace pension schemes are set-up on a Relief at Source basis, and so it is worth checking with your employer if you are unsure.

An increasing number of companies are setting up their workplace pension scheme on a salary exchange (sacrifice) basis.  This is a great way of paying into a pension scheme as you receive full Income Tax relief at source so there is no need to claim from HMRC.  In addition, both employees and employers save National Insurance Contributions (NIC), therefore it becomes even more tax-effective.  Integrity365 can provide more information on this area if it is of interest to you. For more information regarding pension tax relief or workplace pension schemes, please contact your usual BM Connect adviser or get in touch with Craig Pritchard at Integrity365.

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