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.
Saturday 14 November 2009
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.
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