A recent MoneyWeek report confirms that around £1.3 billion in tax relief has gone unclaimed in the last five years.

Between 2016/17 and 2020/21, higher-rate taxpayers failed to claim an average of £245 million a year, while for additional-rate taxpayers, the yearly unclaimed amount was £18 million.

This is a massive amount of money that could make a huge difference to your retirement prospects, determining when you retire and the lifestyle you can afford.

Pension tax relief recently became more important too, after Jeremy Hunt used his spring Budget to increase the Annual Allowance, giving you the chance to make even more tax-efficient pension savings. 

Here are three key factors to consider.

1. Pension tax relief is available to everyone

A key component of a pension’s tax efficiency, tax relief is available on all contributions you make. It applies regardless of your tax band and is paid even if you aren’t working at the time. It is also added to contributions to a child’s pension (which are capped at £2,880 a year).

It is paid automatically at the basic rate of 20%, meaning that a £100 top-up to your pension would only cost you £80, as the additional £20 would be paid by the government.

You can receive this basic-rate tax relief on all contributions you make, up to a set limit, known as the Annual Allowance.

2. The Annual Allowance just became more generous

Jeremy Hunt used his spring Budget to make changes to pension legislation, aiming to make retirement saving even more attractive.

To do this, he increased the value of the tax-efficient contributions you can make each year.

You can read more about the Annual Allowance announcements in your ‘Budget guide: What the chancellor’s spring Budget means for your retirement’, but the main changes were:

• The pension Annual Allowance increased from £40,000 to £60,000 from the start of the 2023/24 tax year.
• The minimum reduction under the Tapered Annual Allowance (TAA) for high earners increased from £4,000 to £10,000.
• The Money Purchase Annual Allowance also rose from £4,000 to £10,000 for 2023/24.

These allowances represent the maximum you can pay into your pensions each year, while still benefiting from tax relief. Maxing out these increased allowances gives you the chance to gain even more “free” money via government tax relief. But you’ll need to make sure you claim.

It’s also important that you know the allowance that applies to you. Both the MPAA and TAA could be triggered accidentally if you pay insufficient attention to your salary or pension options, or if you fail to seek professional advice.

3. Additional tax relief is available to higher earners

On top of the automatic tax relief at 20%, further relief is available to you as a higher- or additional-rate taxpayer, based on your Income Tax rate.

A higher-rate taxpayer can claim an additional 20% (taking their total tax relief to 40% in total), while an additional-rate taxpayer can claim a further 25% (45% tax relief in total).

This means that a £100 increase to the size of your pension pot costs you just £60 as a higher-rate taxpayer and just £55 if you are on the additional rate.

It also means that claiming the relief you are due is vital.

While the standard pension relief of 20% is applied automatically, you’ll need to claim additional relief through your self-assessment tax return. 

Get in touch

Tax relief is a key component of your pensions’ tax efficiency so you must make the most of it. 

With the Annual Allowance rising, you have the potential to gain even more tax relief from the government, and all you need to do is claim it. And with £1.3 billion going unclaimed since 2016, it’s clear the difference the extra money could make.

If you have any questions about how to maximise your pension allowance, or you have any other questions about recent Budget changes or your long-term retirement plans, get in touch. Email info@thepensionplanner.co.uk or call 0800 0787 182. 

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.