Pension Tax Relief

Pensions can be very ‘tax efficient’ investments. There are however strict rules around them.

Anybody can contribute to a SIPP (self-invested personal pension). This will be the person who has taken out the plan, and potentially also third parties. As far as third parties go this could mean and employer but it could also be a partner or relative.

How contributions from third parties are treated will depend on who they are from. Any contributions from partners, relatives and so on are paid net of basic rate tax, as opposed to contributions from employers, which are handled slightly differently, being on a gross basis.

In real terms that means that tax relief on pension contributions amounts to added money for your pension fund. For example if you make a payment of £80 HMRC will add basic rate tax relief of £20 to raise this up to £100. Higher rate tax payers are then able to claim back an additional £20 resulting in the real terms cost of the payment being just £60.

Most pension companies will be able to take the basic rate pension tax relief for you. For those who are paying higher rate tax and therefor qualify for higher rate pension tax relief, they will have to claim this for themselves.

Pension tax relief is as close to money for nothing as it is possible to get. This makes it even more incredible that some of those who are saving money in a pension are failing to take advantage of it.

According to research up to sixty per cent of those eligible to claim the full forty per cent tax relief on their pension contributions. This can rapidly add up to not inconsiderable sums – many people are missing out on over £1000 a year because of this oversight.

The total amount of pension tax relief that is being missed out on is very large. The sum is believed to be in excess of £290million. This is divided between the 290,000 who could potentially not be getting what is due to them.

Making sure that you are receiving the appropriate level of pension tax credit is a good example of why it always pays to take a close interest in your finances. It can be tempting to trust that everything is set up exactly as it should be and that you do not have to do anything.

There is good news for people who discover that they have not claimed all the pension tax credit that they were entitled to. Those who file their own tax return can claim for the previous tax year, while those that do not can claim for the previous two.

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