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Reminding employees to reclaim pension tax relief

3 July 2018

Some employees are failing to reclaim the valuable higher-rate tax relief due to them on pension contributions, and employers should realise that they can help by highlighting the issue and pointing them in the right direction.

Pension contributions attract tax relief at the individual’s highest rate of Income Tax – 20% for basic-rate tax payers, 40% for higher-rate taxpayers (currently earning between £46,351 and £150,000) and 45% for additional-rate tax payers (currently earning over £150,000.) But with certain types of pension scheme the onus is on the individual to reclaim the higher and additional rate element.

This should not be an issue for some occupational and trust-based schemes because personal contributions are normally deducted from gross salary. This means employees automatically get tax relief as they have not paid any tax on the amount deducted.

But for those in group personal pension schemes or other contract-based schemes the situation is very different. In this situation, where contributions are deducted after tax has been deducted, the tax relief is claimed by the scheme at 20% so higher and additional rate tax payers will need to reclaim the additional tax directly from the HMRC. 

Those who complete Self-Assessment tax returns can achieve this simply by filling in the relevant part of the form. For additional-rate payers this is in fact the only route available for them to reclaim the extra 25%.

But many higher-rate tax payers don’t use Self-Assessment, so the onus is on them instead to reclaim the extra 20% tax available by phoning or writing to HMRC to tell them what personal contributions they have made. (They can only claim back higher and additional rate tax relief on Personal Contributions, not employer’s contributions). In practice, however, an alarmingly large number of higher-rate taxpayers never do this. Some are simply not aware of the need to, and often mistakenly believe that their employer is doing it on their behalf. Others may just be apathetic in nature or have an innate dislike of filling in forms or of conversing with HMRC. 

Whatever the reason, those who don’t reclaim their higher-rate tax relief can be missing out on very significant sums, especially as the rules permit them to backdate their requests for up to three previous tax years.  

For example, a higher-rate taxpayer who contributes £400 a month and who reclaims the additional 20% tax available on the current tax year and on the three previous ones will be entitled to receive £3,840. The amounts involved could be far greater still for those making higher contribution levels.  

It should be stressed employers are not actually under any obligation to issue any reminders to their employees in this respect because the pension scheme is a contract between the provider and the employee, and it is the employee’s responsibility to reclaim any tax due.

However, it makes sound business sense to be perceived as a caring employer as it can help boost morale, induce loyalty and help retain highly skilled staff who might otherwise be tempted to move to competitors. Additionally, employers can help solve the problem of unclaimed tax relief by introducing a Salary Exchange scheme – This is an agreement between employer and employee by which the employee can give up some of their salary. The employer can then pay this into the pension scheme along with their contribution.   

As there are no personal contributions under a salary exchange arrangement, there are no requirements for members to reclaim tax. In addition, this approach potentially provides saving for employer’s and employee’s National Insurance (NI) contributions, depending how it is established.     

If you would like to find out more about how Chase de Vere can help you set up a Salary Exchange scheme or require any more information relating to higher-rate tax relief on employee pension contributions then please do not hesitate to contact us on 0345 300 6256 or complete this simple form and we’ll call you.