How to claim higher rate tax relief

Are you a higher-rate taxpayer? You could reclaim an extra 20% tax on your pension contributions for a total of 40% tax relief.

We reveal what you need to know about claiming higher-rate tax relief.

Tax
relief is the principle that all income you pay into a pension scheme should be exempt from income tax.

However,
as income tax is usually paid at source, which is via PAYE if you’re an employee, this money is repaid to you on
every pension contribution you make.

Basic
rate relief of 20% is automatically added to any pension contributions and paid
into the fund. But
if you are a higher-rate taxpayer, things are more complicated as you’ll pay
40% tax on all your income over the higher-rate threshold.

You
can claim an extra 20% tax relief on £30,000, the amount you paid higher rate
tax on, through your tax return or by contacting HMRC.

There
is no extra relief on the remaining £5,000 you contributed to your pension.

Claiming all
tax reliefs is a vital way of ensuring you get the most out of your pension
contributions.

In practical
terms, making a pension contribution with higher-rate tax relief is like
getting a boost of around 66% on the amount you pay in.

Why 66% when
the higher-rate tax is 40%? This is due to how percentages work. For instance,
if you pay 40% tax on £100, it is reduced to £60.

But if you pay
that £60 into a pension, the income tax is repaid – pushing it up to
£100 again. And £60 turned into £100 is an increase of (roughly) 66%.

So in terms of
value for money, higher-rate pension contributions are hard to beat.

Talk to your
employer about how they make pension contributions for you, as under some schemes,
such as salary sacrifice, you may receive your tax
relief in a different way.

Unlike
basic rate tax relief, you need to claim higher rate tax relief on your pension
contributions.

You
can do this in two ways: through your self-assessment or by contacting HMRC.

To
claim through your self-assessment, you will need to do so online. You should
go to the relevant section of the online form and state the exact amount of your pension contributions.

This should be
a gross calculation that includes your contributions and basic rate tax relief
of 20%. Not doing this is one of the most common mistakes people make.

You can also
write to HMRC. You can find the relevant address on your P60 or
payslip, and the letter should outline exactly how much you have paid.

You will also
need to provide personal details so you can receive tax relief. Bear in mind
you will need to submit a new letter every time you alter your pension
contributions or your salary changes.

You
can make backdated claims for higher rate tax relief on your pension
contributions, although there is a time limit as you can only claim back tax
relief for the last four tax years.

If
you have only been a higher-rate taxpayer for a short period, it should be
simple to claim back the missing tax relief.

There
is a cap on the level of tax relief you can receive.

Your annual allowance, or
the highest amount you can put into your pension
each year, is £60,000 or 100% of your qualifying earnings, so this means you
can only receive tax relief on this amount.

There
was a lifetime allowance, which meant you could draw a maximum of £1,073,100 from your
pension without incurring extra charges, but this charge was stopped on 6 April
2023 and will be abolished this year. 

It
is not only you and your employer who can pay into your pension pot. Other
people can make pension contributions for you, and you will receive tax relief
on these, too.

In
these instances, you will still receive basic tax relief and would still need
to claim the higher rate of tax relief on the gross contribution based on your
circumstances.

The
third party is not entitled to any tax relief on their contribution as it is
counted as if you had made the contribution yourself.

If
your taxable income is over £125,140, you’ll pay a tax rate of
45% on everything over this threshold.

So,
you can claim additional tax relief on that amount – an extra 5%, to give you
45% tax relief on all contributions from your income over this threshold.

You’ll
have to claim it back via your self-assessment form or by contacting HMRC.

This post contains affiliate links, so we may earn a small commission when you make a purchase through links on our site at no additional cost to you