Less than a third of Brits could identify the purpose of pension tax relief, according to research for finance experts Hargreaves Lansdown. Just 31% knew what it was for, with 7% believing it enabled them to claim back tax in retirement, while more than 40% admitted they simply didn’t know.
The relief allows workers to get tax relief on private pension contributions worth up to 100% of annual earnings. In this tax year, the annual tax-free allowance is £60,000, and Brits will only pay tax if they exceed this. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said we need to raise awareness of this “hidden hero of pensions” to help people make the most of their retirement saving, and protect them from any “nasty surprises”.
She highlighted the ‘carry forward’ initiative, which enables workers to boost their contribution by utilising any unused annual allowances from the previous three tax years. “It’s an enormously tax efficient way to make the most of your long-term saving.”
The amount of tax relief depends on your earnings, so a basic rate taxpayer gets relief of 20%, a higher rate taxpayer gets 40%, and an additional rate gets 45%.
While the tax relief is often applied automatically, the expert said that some may be missing out if they don’t realise they need to claim back extra tax themselves.
“Not being aware of how tax relief works can mean you don’t make the most of it. One key example is understanding how much tax relief you are receiving and whether you need to act to claim more.
“If you are in a salary sacrifice or net pay scheme (where your contribution is made before tax is calculated), then you will receive tax relief on your contribution at the correct rate.
“However, if you are contributing to what as known as a relief at source scheme then your pension contribution is taken from your after-tax pay.
“This means that you will only get 20% tax relief on your contribution so if you pay tax at higher or additional rates you will need to claim the extra relief yourself through your tax return.”
Some workplace pensions and all personal pensions – such as SIPPs – are set up under relief at source, so she urged workers to be aware of this to get the tax relief they are entitled to.
Even those who aren’t working can also benefit from tax relief on pension contributions. Brits can contribute up to £2,880 per year to their Self-Invested Personal Pension (SIPP) and the government will give tax relief, topping it up to £3,600.
“This applies to your own contributions as well as those made on your behalf,” the pensions expert added. “So, if one partner has made the most of their own pension allowances and has some spare cash, they can use it to bolster their retirement resilience of a non-working partner or even a child through a Junior SIPP.”
