The freezing of tax rate bands means that increasing numbers of taxpayers are liable to tax at 40%

Global Mobility Director Robert Salter said: “Private pension contributions paid into a UK pension scheme are automatically entitled to 20% tax relief. The pension scheme will claim back 20% tax relief from the Government and add this to the individual taxpayer’s overall pension contribution. For example, a net contribution by a taxpayer of £80 is then increased to £100 with the money which is clawed back from the Government.

“The above arrangement is simple and effective and works well, where the taxpayer is only a 20% taxpayer, as the additional money going into the pension scheme represents the full amount of tax relief that the taxpayer is entitled to.

“However, as taxpayers may be aware, the Government has frozen tax bands over the past few years and is presently planning to do this for the next 2-3 years too.

“The freezing of tax rate bands means that increasing numbers of taxpayers are liable to tax at 40%. Sadly, this means that the full, tax efficient relief of private pension contributions in such cases can easily be lost.

“That is, tax relief for private pension contributions is available at one’s marginal rate of tax – so 40% for many people – but only 20% relief is being claimed back by the pension fund and the ‘delta’ of 20% may simply be lost if taxpayer’s do nothing.

“For people in such situations, it is important that they ensure that they pro-actively protect themselves regarding their tax relief position. This can be either via the preparation of an annual tax return, to ensure that the claim for relief is formally obtained within the annual tax return assessment, or alternatively via ensuring that they contact HMRC on a timely basis, so that the pension contributions are included, for example, when their PAYE tax code is assessed.

“Tax is rarely a ‘favourite subject’ for people, and this is more true today than ever before given the increasing pressure that they are under due to the cost-of-living crisis. However, it is now more important for people to ensure that they claim all the tax relief to which they are legally entitled.”

Would you like to know more?

If you would like to discuss the above, please get in touch with your usual Blick Rothenberg contact or with Robert Salter using the form below.