Missing tax relief could cost a person £122,000 in pension wealth, according to analysis by Interactive Investor.
A poll by the flat-fee investment service found a third of higher rate taxpayers are missing out on additional 20 per cent pension tax relief by not completing a self-assessment tax return.
Higher rate taxpayers paying £5,000 into a private pension each year could lose out on £1,250 while those paying £10,000 missing out on £2,500 a year.
Alice Guy, head of pensions and savings at Interactive Investor, said: “Many people assume they automatically get all the pension tax relief they’re entitled to but for higher rate taxpayers that’s simply not the case.”
The deadline for self assessment tax returns is January 31, 2024.
However, people can backdate claims for four tax years or alternatively call HMRC to reclaim.
Increasing numbers of higher rate taxpayers
Andrew Tully, technical services director at Nucleus said this issue was “more important than ever before” due to the increasing numbers of higher rate taxpayers.
Tax thresholds have been frozen until 2028 meaning many existing taxpayers are being brought into the higher rate band.
With the Office for Budget Responsibility forecasting there will be 30mn taxpayers being pulled into the higher-rate band by 2027-28.
John Chew pension, tax and estate planning specialist at Canada Life pointed out that frozen tax thresholds, combined with the complex nature of the UK pension system that people need to navigate, are ‘exacerbating’ the issue for those missing out on tax relief.
Impacts on retirement
Claire Trott, divisional director of retirement and holistic planning at St. James’s Place, warned that not claiming tax relief means a loss of at least half of the main benefit of saving into a pension.
She said: “The scheme will reclaim 20 per cent but with 20-25 per cent missing then you need to save significantly more in order to get the same level of retirement income.
“This money isn’t going anywhere else, apart from to HMRC so you are basically paying more than they need.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown suggested this issue can have an ‘enormous impact’ on what a person can end up with in retirement.
In December 2023, Close Brothers Asset Management revealed - in a report titled ‘Spotlight on UK financial wellbeing’ - that 35 per cent of employees in the UK are worried they won’t be able to retire, with the number rising to 41 per cent for over 55s.
According to the report, not being able to afford retirement was the main concern therefore having the chance to get some money back through pension tax relief may help those concerned with this.
Morrissey highlighted this is an area advisers ‘can and do’ play an important part in making sure that clients are well-informed about their options.
She added: “However, for those without an adviser, it’s an area they may know nothing about and it’s something providers and employers could do more to raise awareness of.”
