We can’t recall a recent Budget when there weren’t widespread concerns about the prospect of higher-rate tax relief on pension contributions being abolished.
But the sighs of relief from the pensions community when Rishi Sunak wrapped up his speech on March 11th this year without making the change were far more audible than normal.
It was well known that the new Chancellor of the Exchequer had been seriously considering such a move, which it was estimated would raise him around £10 billion a year to help his massive expenditure programme.
So, anyone who hasn’t been capitalising on the ability to receive a 40% or 45% boost to pension contributions should be making up for lost time, especially as the current window of opportunity may be extremely short-lived.
It doesn’t take a genius to work out that, with it having become necessary to pledge far greater State support to combat the coronavirus crisis since the Budget, this will have to be paid for from somewhere.
The Government will probably have to make U-turns on a range of major decisions to help us survive these unprecedented times, and the higher-rate relief seems a sitting duck.
Employees wishing to make hay whilst the sun is still shining should be made aware that, as long as they don’t exceed the overall lifetime allowance (£1.073 million for the 2020/21 tax year) and have sufficient earnings to justify it, they can make tax-efficient pension contributions of up to a £40,000 annual allowance.
What is less commonly realised is that they can also mop up unused tax relief from up to three previous tax years by taking advantage of the ‘carry forward’ rules, provided they have contributed the maximum allowed in the current tax year and that the total they contribute across the different years doesn’t exceed their current year’s earnings.
We generally tell our high-net-worth clients exactly how much of their annual allowance they have available from past years, and many of them choose to max out their current year’s allowance and use up what they can from the first available past tax year – as they know this is the tax year that will cease to be relevant during the next one.
It is also important that employees realise that it is only basic-rate tax relief that gets added at source. Higher-rate relief must actually be reclaimed from HMRC.
Unfortunately, not everyone has access to a financial adviser – who can do this for them or at the very least make them aware of the need to do it. So, many higher-rate tax payers are missing out on tax rebates that could make a very significant difference to the size of their eventual pension entitlements.
This tends to be a particular problem for those earning only £10,000 to £20,000 over the higher-rate threshold as they generally don’t complete tax returns or have an accountant or independent financial adviser (IFA).
Employees should be made aware that there are two ways via which they can reclaim higher-rate tax relief.
The first is by entering the amount of gross personal contributions made in the relevant part of their annual self-assessment form. The relief will then be granted either via a change in tax code, a tax rebate or a reduction in tax already due to HMRC.
Alternatively, they can phone or write to their local tax office with details of their pension scheme, the gross amount of the personal contributions paid and their start date. The tax office will then arrange for their tax code to be changed so that higher-rate relief is available throughout the year in which the contributions are made.
Any changes to the information given can be notified either by letter or through a self-assessment tax return at the end of the tax year.
If anyone has failed to reclaim tax relief in the past all is not lost as there is a time limit of four years within which it can be obtained from HMRC. ¹
Content correct at time of writing and is intended for general information only and should not be construed as advice.