Don’t forget the tax relief
We recently spoke with a client who pays £500 into their pension from their bank account. The client is a higher rate tax payer and so is entitled to higher rate tax relief. Basic rate tax relief is 20% and higher rate tax relief is 40%. You might find it amazing, but if you make a £100 contribution to your pension and are a basic rate tax payer, the tax relief is not £20 but £25! This is because you need to ‘gross up’ the payment. This means paying £80 to get £20 tax relief. This makes an incredible difference for higher rate tax payers because they get 40% of tax relief on a £100 payment. But here’s the thing: whereas basic rate relief is given automatically, you must claim higher rate relief. Our client had not been doing this. If you make payments into a pension and are a higher rate tax payer, you must reclaim the additional relief. To do this you must complete an annual self-assessment tax return. If you have not done so, you can go back four years to claim unused relief. To do this, you will need to send a letter to your tax office with details of your claim.