Pensions - have you claimed full tax relief?
22nd April 2014
Pensions – have you claimed full tax relief?
According to figures provided by Prudential just over a quarter of higher rate taxpayers (those currently earning over £41,865 pa) have not claimed the higher rate tax relief to which they are entitled on pension contributions. The average higher rate taxpayer is missing out on tax relief worth £1,255 per year and it is only possible to make a claim for backdated tax relief for the last four years; after that any tax relief is lost forever.
Do you know how much a pension contribution will actually cost you?
If a 40% taxpayer makes a pension contribution of £10,000 the taxman will add tax relief of £2,500 to that, making the contribution worth £12,500 to the pension fund. Further higher rate tax relief of £2,500 can be claimed either via Self-Assessment or by an allowance in your PAYE code. This means that your annual tax bill is reduced by £2,500, so that it has actually only cost £7,500 to contribute £12,500 to a pension fund.
For taxpayers with incomes in excess of £100,000 or those who pay tax at the additional rate of 45% the tax relief may be higher.
If a basic rate taxpayer makes a pension contribution of £10,000 then the taxman will still add tax relief of £2,500, making the contribution worth £12,500 in the pension fund. There is however no extra tax relief available and so no reduction to your annual tax bill. In this situation it will cost £10,000 to contribute £12,500 to a pension fund.
Is there a maximum amount that can be paid each year?
Currently the maximum annual limit is £40,000 (or the amount of your earnings if they are lower than £40,000). It is possible to increase the amount payable by utilising any unused relief from previous years and a careful assessment needs to be made in order to establish the total amount which can be paid.
Can non-earners make pension contributions?
Even those who do not have any earnings can contribute to a pension scheme, but there is a limit. The maximum payment that can be made is £2,880 each year. The tax man will add tax relief of £720 making the contribution worth £3,600 in the pension fund.
Author Karen Oliver, Tax Manager