Pension contributions – are you getting enough tax relief?

We still come across cases where taxpayers, particularly those coming to us as new clients, haven’t received all the tax relief they are due on pension contributions – which isn’t entirely surprising considering the different ways these can be paid.

If you are only self-employed, then you can only pay contributions personally. In the vast majority of cases, these will have basic rate tax relief (20%) deducted at source and if you are a basic rate taxpayer, this will give you the relief you are due. If you are a higher rate taxpayer then you could be due a further 20% or 25% relief (based on the gross equivalent contributions) which you can only obtain by making sure the contributions are included in your tax return. Some people still pay into old style “retirement annuity” contracts which do not have any tax relief given at source – so these need to be claimed on the tax return whether you are a basic rate or higher rate taxpayer.

If you are employed, then there are further options available – which can make deciding if you have received full tax relief even more confusing!

If, as an employee, you pay contributions out of your own bank account, then the position is the same as for the self-employed mentioned above – though, very occasionally, someone might pay into a “SSAS” with the premium paid gross so again no relief is given at source.

Interestingly, it is not so much these contributions that give rise to under-claims for tax relief – greater confusion arises where contributions are paid through payroll.

It is quite common for employees to enter into “salary sacrifice” arrangements with their employer. Here, the employee takes a reduced salary and the employer increases its contribution to the pension scheme. In this case, there is no tax relief to claim because the employee has been taxed on a lower amount of salary.

The employer might have its own pension scheme into which the employee pays a gross contribution by the employer deducting this from salary before tax under PAYE is calculated. This is known as the “net pay” scheme and in this way the employee will receive tax relief in full because his taxable salary is reduced. You can tell if this is happening because the payslip will show the deduction in arriving at gross taxable pay.

Sometimes, the employee’s contribution might be paid gross but relief is not given under the net pay scheme. In this case, tax relief has to be claimed from HMRC.

The most common scenario is where the employee pays contributions through payroll but they have had basic rate tax relief deducted at source. In this case, only basic rate relief is given and any higher rate relief must be claimed from HMRC. You can tell if this is happening because the payslip will show the net contributions being deducted from net (post tax) pay.

How do you as an employee claim any tax relief you are due?

If you do not need to submit tax returns, then you must let HMRC know what arrangements you have made so that your tax code (which shows how much salary you can receive tax free) can be increased.

If you are under Self Assessment then you must include all pension contributions in your tax return – except those under a salary sacrifice or net pay arrangement. You can also let HMRC know directly so that your tax code can be adjusted to give relief on each pay day instead of waiting for the end of the tax year.

It is surprising how many people think they have had full tax relief on pension contributions when they haven’t. Don’t take the risk of being one of these – let your tax adviser know what pension contributions you make and how – and make it clear whether these are paid gross or net.

We recommend that you review your pension arrangements regularly. Please speak with Terry Burgum, Chartered Financial Planner here or on +44 (0)330 124 1399 to discuss your options.

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