How to claim higher rate tax relief on pension contributions

Higher-rate taxpayers may be able to reclaim an additional 20% of their pension contributions’ tax, resulting in a 40% tax credit. When you contribute to a pension, you earn tax breaks on every dollar you put in. Higher-rate taxpayers may not be aware that they must apply for this relief if they want it.

Read more about higher-rate tax relief here.

What is higher rate tax relief?

It would help if you did not have to pay income tax on any of the money you put into a pension plan. As a result, you receive a refund on every pension contribution you make because income tax is normally paid at the source (via PAYE if you’re an employee).

Your pension contributions are immediately tacked on with a 20% rate reduction, sent straight into the fund. Things get a little more complicated if you’re a higher-rate taxpayer. All income above the higher-rate threshold will be taxed at 40%, so you can claim an additional 20% on this portion of your income if you contribute it to your pension fund. However, you must file a self-assessment tax return to get this money.

For example:

You earn £80,000 a year and are subject to a 40% tax rate on the first £30,000 of that amount. A total of £35,000 was placed in a private pension fund by you during that tax year. The base rate tax relief of 20% is immediately applied to the full amount.

If you paid a higher rate tax of £30,000, you could get an additional 20% tax relief by filing a return or writing to the tax office. Your final £5,000 contribution to your pension will not be eligible for additional tax benefits.

How does higher rate tax relief help my pension?

Higher-rate taxpayers receive an additional tax break that makes saving for retirement at this rate up to twice as lucrative as saving at the basic rate. Taking advantage of all of the tax breaks available to you is critical to maximizing the value of your pension contributions.

When you contribute to a pension with higher-rate tax relief, you’re effectively getting a 66% jump in the amount you contribute. Why 66% when the higher-rate tax is only 40%? Percentages behave in this manner. For example, if you pay 40% tax on £100, you’ll get £60 back. However, paying that £60 into a pension recoups that income tax, bringing the total to £100. And a 66% rise from £60 to £100 is a significant gain. As a result, higher-rate pension contributions offer excellent value for money.

In other cases (such as salary sacrifice), you may receive an income tax relief in a different way depending on how your employer makes pension contributions on your behalf. Even though you have many options when it comes to your workplace pension contributions, you can still get guidance from a financial advisor.

How do I claim higher rate tax relief?

Unlike basic-rate tax relief, you will have to claim higher rate tax relief on your pension contributions actively. Self-assessment or direct contact with HMRC are the two options.

You’ll need to submit your self-assessment online to get reimbursed. Your pension contributions should be listed in the appropriate part of an online form. This gross computation should include your donations and the 20% basic rate tax relief. One of the most common mistakes people make is not doing this. If you qualify for a rebate at the end of the year, a reduction in your taxes, or a change in your tax code, you will receive your relief.

Write to your HMRC tax office as well. Using your P60 or payslip, you should be able to discover the correct address, and the letter should detail exactly how much you’ve paid. As a condition of receiving tax assistance, you will also need to furnish personal information. Keep in mind that you will need to submit a new letter every time you change your pension contributions or your salary.

Can I claim tax relief for previous years?

There is a time limit on making backdated claims for higher rate tax relief on your pension contributions. You can only claim tax reduction for the previous four tax years. If you’ve only been a higher rate taxpayer for a short time, reclaiming some of the lost tax relief should be simple.

What are the limits on pension tax relief?

There is a limit to how much tax relief you can get. Currently, your annual allowance (or the maximum amount you may put into your pension each year) is £40,000, or 100% of your qualifying earnings. This implies you can only deduct this amount from your taxes. There is also a lifetime allowance, which allows you to withdraw up to £1,073,100 from your pension without paying further charges. Keep a tight check on your pension contributions to be sure you don’t go over this limit unintentionally. You can use our pension calculator to keep track of your finances.

Can other people pay into my pension, and what tax relief do I get?

You and your employer aren’t the only ones who can contribute to your pension fund. Other people can contribute to your pension on your behalf, and you will get tax reductions on these as well. In certain cases, you will still receive basic tax relief and, depending on your circumstances; you will need to seek higher rate tax relief on the gross contribution. The third-party does not receive any tax benefits for their assistance; it is treated as if you had made it yourself.

Can I claim additional rate tax relief?

Those earning more than £150,000 will pay a tax rate of 45 per cent on all income above this level. To put it another way, you’ll be able to claim an additional 5 per cent tax reduction on that sum, bringing your total tax relief to 45 per cent. Your self-assessment will be the only way to get it back.

Maximize the value of your pension by contacting a financial advisor or accountant.

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