Figures obtained by pensions consultancy Lane Clark & Peacock (LCP) suggest that many savers are unaware they must actively claim additional tax relief if they pay into a pension from their net pay and fall into a higher tax band.
The issue has come into sharper focus as the self-assessment deadline passes, with experts warning that newly promoted or higher-paid employees are particularly at risk of missing out.
Those most affected are people with a single job who have recently crossed into the higher-rate tax band, as they may not realise that filing a tax return is required to reclaim the extra relief they are entitled to.
Steve Webb, a former pensions minister and now a partner at LCP, said growing numbers of people were being caught out.
“With more and more people being dragged into higher rates of income tax, it is important to claim all the tax relief they are entitled to,” he said.
How pension tax relief works
In the 2023–24 tax year, almost seven million people paid into pensions using the relief at source system, where contributions are taken from net pay. Under this method, savers automatically receive 20 per cent basic-rate tax relief.
However, higher-rate taxpayers earning more than £50,270 and additional-rate taxpayers earning above £125,140 must claim the remaining relief themselves via a self-assessment tax return.
By contrast, those contributing through salary sacrifice receive their full tax relief automatically, as pension contributions are deducted from gross pay, reducing both income tax and national insurance.
For example, a saver who contributes £800 to a pension will see it topped up to £1,000. Higher and additional-rate taxpayers can reclaim a further £200 or £250 from HMRC, either through an adjustment to their tax code or a direct payment though this extra relief is not added to the pension pot.
£1.4bn potentially unclaimed
LCP estimates that around 1.1 million higher-rate taxpayers and 170,000 additional-rate taxpayers are entitled to extra pension tax relief on relief-at-source contributions.
However, take-up remains low. Only around 316,000 higher-rate taxpayers roughly 28 per cent are claiming the relief they are owed. Additional-rate taxpayers are far more likely to claim, with around 88 per cent doing so.
According to HMRC figures, the average higher-rate taxpayer who successfully claims receives £1,756 a year, rising to £2,195 for additional-rate taxpayers.
If all eligible savers claimed the relief, LCP estimates it would cost the Treasury £1.46 billion annually.
Webb said the true figure may be even higher, as higher earners typically make larger pension contributions than the national average used in the calculations.
Taxpayers can claim pension tax relief by completing a self-assessment return, entering the total amount paid into their pension, including the basic-rate relief already received. Claims can also be made retroactively for up to four previous tax years.
