Pension tax relief for higher rate earners explained

In the UK, higher rate taxpayers can claim an additional 20% and additional rate taxpayers an extra 25% tax relief on their pension contributions.

This additional tax relief is one of the biggest benefits of saving into a pension for high earners, but many don’t realise that this relief won’t happen automatically. Unlike basic rate tax relief which is claimed and automatically added to your pension by your provider, you have to claim the higher rate tax relief yourself.

We’re here to help you understand what higher and additional rate tax relief is and how you can claim it.

What is higher rate pension tax relief?

Higher rate pension tax relief is an extra level of relief that can be claimed by individuals in the higher or additional rate tax bands.

An extra 20% tax relief can be claimed by higher rate taxpayers on earnings they pay 40% tax on, meaning they could get up to a total of 40% in pension tax relief. For example, an individual could have £10,000 of pension contributions costing them as little as £6,000.

Additional-rate taxpayers can claim an 25% extra tax relief on earnings they pay 45% tax on, totalling up to 45% in pension tax relief. For example, an individual could have £10,000 of pension contributions costing them as little as £5,500.

Another great benefit of higher rate pension tax relief is that it doesn’t have to go into your pension. You can enjoy the bonus tax relief through a reduction in your annual tax bill, a tax rebate or a change to your tax code (which would reduce your tax bill the following year).

Because this additional pension tax relief is often overlooked, it’s estimated that £830m each year isn’t claimed! Let’s take a look at how to claim the extra tax relief…

How do I claim higher rate pension tax relief?

1. Check your tax bracket: Higher rate taxpayers (those earning over £50,270) are eligible for 40% tax relief on pension contributions. Additional rate taxpayers (those earning over £125,140) are eligible for 45% tax relief.
2. Contributions from net income: If you’re contributing to a pension scheme that operates under the relief at source method (most workplace pensions and personal pensions), your contributions will be taken from your net income after tax has been deducted. The pension provider then claims basic rate tax relief (20%) from HRMC and adds it to your pension pot automatically.
3. Claiming additional tax relief: To claim the additional tax relief for higher rate taxpayers, you need to include your pension contributions on your annual tax return. You can claim the difference between the basic rate tax relief claimed by your pension provider and your highest rate of tax.
4. Through self-assessment: If you’re not already in self-assessment, you may need to register for it to claim the additional tax relief. You can do this through the HMRC website or by contacting HMRC directly.
5. Declare pension contributions on tax return: On your tax return, there will be a section where you can declare your pension contributions. You’ll need to enter the total gross amount of your contributions (including the basic rate tax relief already claimed by your pension provider).
6. Receive tax relief: Once you’ve submitted your tax return, HMRC will calculate the additional tax relief you’re entitled to based on your tax bracket. This additional relief will either reduce the tax you owe or increase any tax rebate you’re entitled to.
7. Keep records: Make sure to keep records of your pension contributions and any tax relief claimed, as HMRC may ask for evidence to support your claim.

Here to help

Making use of your pension allowances and claiming the full tax relief available to you is an important part of financial planning and is critical in planning for retirement. If you’d like advice and guidance on making the most of your pension contributions, please get in touch with our friendly team of experts.