Are you missing out your pension tax relief?

Under some pension schemes the onus is on higher rate taxpayers to claim their tax relief, but many don't realise they are failing to recoup thousands.

People saving in company pension schemes are losing thousands of pounds each year because they are only getting half the tax relief they are due.

Pensions tax relief is one of the most generous giveaways going, which is why Alistair Darling is reining it in for people earning more than £150,000 from 2011.

But around a quarter of a million higher rate taxpayers are missing out on tax relief of 20 per cent of pension contributions because they think their employer is already claiming it for them.

The figures, calculated by Standard Life, the pension provider, show that up to 250,000 higher rate taxpayers, adding up to one in two high earners in risky money purchase pension schemes, are not reclaiming thousands of pounds of tax rebates that are due.

Employees in final salary schemes or occupational money purchase schemes, which have boards of trustees, receive their higher rate tax relief automatically. But people in group stakeholder schemes or group personal pensions (GPPs), the most common type of money purchase schemes around, have to claim back their higher rate tax themselves.

It costs someone in an occupational scheme £600 to get £1,000 in their pension scheme. Those in group stakeholder pensions or GPPs on the other hand have to pay in £800 to get a £1,000 credit in their pot, and then have to claim back the other £200 from HMRC, usually a year later, and in many cases not at all. Those in group stakeholder pensions and GPPs who are not reclaiming their higher rate relief are paying a third more for the same pension.

The easy way to figure out what sort of scheme you are in is to see if there is a board of trustees mentioned on your yearly pension statement. If there is, you are in an occupational scheme and should be getting your higher rate relief. If there isn't, it is down to you to make sure you do.

These types of pension are treated differently because of a legal technicality relating to the way the plans are set up. Even though group stakeholder plans and GPPs are offered through the workplace, they are treated by HM Revenue & Customs as individual personal pensions. As a result, HMRC requires the individual to file a tax return in person or get their tax code changed as if they were paying into a personal pension they had taken out themselves.

Andrew Tully, senior pensions policy manager at Standard Life says: "Lots of people don't know that the obligation is on the individual to keep claiming back their higher rate tax. HM Revenue & Customs often don't send requests for tax returns to employees where they have no other income as they think they are not going to get any more tax out of you. But you could be entitled to tax out of them."

Experts add that many people start off working for an employer as a basic rate taxpayer and only become a 40 per cent taxpayer years later as a result of annual pay rises and promotions. It can be common in these situations for people not to realise they are entitled to cash back from HMRC.

Joel Adams, chief executive of Chartwell Financial, an independent financial adviser, says: "It will say somewhere in the small print of your pension documentation that the onus is on you to claim back higher-rate tax relief. But many company schemes do not communicate this message very well and so people often don't realise what they are missing out on."

For example, someone earning £70,000 a year and paying 10 per cent of salary into their pension could be missing out on a tax rebate of £1,400 a year if they are not claiming their higher rate tax relief. And when you do claim, the money is paid as cash outside the pension, allowing you to spend it as you wish.

"People really need to understand that the onus to be responsible for their own pension saving is being placed squarely on their shoulders, and that extends to making sure you are getting all the tax relief you are due," says Tom McPhail, head of pensions policy at Hargreaves Lansdown.

Higher rate tax relief is also being missed on charitable gifts, according to the Charities Aid Foundation. Research it carried out earlier this year found that half of all higher rate taxpayers making charitable donations, whether regular or on a one-off basis, were unaware they were entitled to 20 per cent tax relief on sums paid. A 40 per cent taxpayer paying £80 a month to a charity is entitled to £240 cash back from HMRC each year.

Getting your higher rate tax back is relatively straightforward. You will get the tax back if you complete a tax return, but Adams adds that for people who do not have complex finances the more straightforward way is to get your local tax office to change your tax code. He says: "Getting your tax code changed is straightforward. You have to simply write to your local tax office notifying them of your situation. They will then continue to adjust your tax levy to account for your pension contribution. But if you get a pay rise, and your pension contribution goes up as a result, you need to let them know. Otherwise they will continue to give you relief based on your previous pension contributions."

Some people make pension contributions for years without realising they are entitled to higher rate tax relief. The good news is that you can claim up to six years of relief back by making a backdated claim. You are entitled to make a claim going back up to 5 years and 10 months after the end of the year to which the claim relates. However, there is a proposal to reduce this period for some backdated claims to four years.

To make a claim simply write to your local tax office explaining why you believe you are entitled to a backdated rebate. They may ask for more information before sending you your money, but it is worth persisting. A cheque from the Revenue will be a welcome relief.

Recouping tax relief is just one of the many tips on how to save for your future contained in John Greenwood's book The Financial Times Guide to Pensions and Wealth in Retirement (FT Prentice Hall), published on Tuesday 19 November, and available for pre-order with a 30 per cent discount at www.pearson-books.com/ftpensions

The rebate: How does it work?

* Peter and Paul both earn £60,000 a year and pay 10 per cent of their salaries into their workplace pension.

* Peter is in an occupational scheme. His £6,000 annual contribution is deducted from his salary before tax is calculated so the net cost to him is only £3,600.

* Paul is in a group-personal pension. He pays in a net contribution of £4,800, which is automatically grossed up to £6,000.

* Paul finds out that he has been missing out on his higher-rate tax relief for eight years. He discovers he is entitled to a tax rebate of £1,200 each year, which is paid outside the pension. This makes his gross contribution each year £3,600.

* He makes a backdated claim to HM Revenue & Customs and is able to claim back for six previous tax years. He recoups a backdated rebate of 6 x £1,200 = £7,200.

Independent Partners: 10 top tips for retirement. Get your free guide here

News
peopleHowards' Way actress, and former mistress of Jeffrey Archer, was 60
Sport
Romelu Lukaku puts pen to paper
sport
News
Robyn Lawley
people
Arts and Entertainment
Unhappy days: Resistance spy turned Nobel prize winner Samuel Beckett
books
PROMOTED VIDEO
News
people
Life and Style
Troy Baker and Ashley Johnson voice the show’s heroes
gamingOnce stilted and melodramatic, Hollywood is giving acting in video games a makeover
News
i100
Life and Style
Phones will be able to monitor your health, from blood pressure to heart rate, and even book a doctor’s appointment for you
techCould our smartphones soon be diagnosing diseases via Health Kit and Google Fit?
News
people
Extras
indybest
Travel
Ryan taming: the Celtic Tiger carrier has been trying to improve its image
travelRyanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?
Sport
Usain Bolt confirms he will run in both the heats and the finals of the men's relay at the Commonwealth Games
commonwealth games
Life and Style
Slim pickings: Spanx premium denim collection
fashionBillionaire founder of Spanx launches range of jeans that offers 'thigh-trimming construction'
News
Sabina Altynbekova has said she wants to be famous for playing volleyball, not her looks
people
News
i100
Life and Style
tech'World's first man-made leaves' could use photosynthesis to help astronauts breathe
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior Investment Accounting Change Manager

    £600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

    BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

    £450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

    Senior Analyst - ALM Data - Banking - Halifax

    £350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

    Java developer - Banking - London - Up to £600/day

    £500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

    Day In a Page

    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices
    Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

    Could smartphones soon be diagnosing diseases?

    Health Kit and Google Fit have been described as "the beginning of a health revolution"
    Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

    Can we learn to love Ryanair again?

    Four recent travellers give their verdicts on the carrier's improved customer service
    Billionaire founder of Spanx launches range of jeans that offers

    Spanx launches range of jeans

    The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
    10 best over-ear headphones

    Aural pleasure: 10 best over-ear headphones

    Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
    Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

    Commonwealth Games

    David Millar ready to serve up gold for his beloved Scotland in the end
    UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

    UCI Mountain Bike World Cup

    Downhill all the way to the top for the Atherton siblings
    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
    A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

    A former custard factory, a Midlands bog and a Leeds cemetery

    Introducing the top 50 hidden spots in Britain
    Ebola epidemic: Plagued by fear

    Ebola epidemic: Plagued by fear

    How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
    Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

    From 'Parks and Recreation' to 'Guardians of the Galaxy'

    He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star