How do you claim higher rate tax relief on pension contributions?

Whether you are new to investing or nearing retirement, pensions are likely to be an important consideration. When you “contribute” to your pension, the government adds more money. This is called tax relief and is one of the main advantages of using a pension to save for retirement.

This special helping hand can have a considerable impact on the size of your funds – and your income in retirement.

Yet many people don’t understand how this works, especially in relation to higher and additional rate tax relief which, in respect of personal pensions, has to be claimed.

What is higher-rate pension tax relief?

Currently, anyone under 75 with relevant UK earnings can receive tax relief when they make a contribution within the annual allowance to a personal pension such as our SIPP.

The government adds 20%, representing basic rate tax relief, which is claimed from HMRC by the pension provider. This is known as ‘relief at source’. For example, an investor contributes £8,000 into their SIPP and £2,000 is paid in on top, meaning £10,000 ends up in the account.

For higher or additional rate income taxpayers, further tax relief can be reclaimed. Broadly, you start paying a higher rate tax at just over £50,000 of income a year, and the additional rate starts at £125,140 in the current 2024/25 tax year.

For earned income, the tax rates are 40% and 45% respectively, which means there is a further 20% or 25% to reclaim on pension contributions for higher and additional rate taxpayers. Using the £10,000 example above, an extra £2,000 or £2,500 can be repaid to you.

This means a £10,000 pension contribution costs just £6,000 or £5,500 in net income terms. That’s a huge boost to your money and an uplift that would otherwise only come with lots of risks or plenty of time in the market. Another way of looking at it is that it reduces your tax bill for the year, and you get to keep more of the money you earn.

Please note, rates of income tax, and therefore tax relief, differ in Scotland.

The tax treatment of pensions depends on individual circumstances and is subject to change in future. The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change.

How to claim higher rate tax relief on pension contributions

Many people assume the process of claiming higher or additional rate pension tax relief is complicated, but in fact, it’s pretty straightforward.

• You can claim the tax relief on your Self Assessment tax return by stating the gross amount of your total pension contributions for the tax year i.e. including the 20% basic rate relief already added. If you use the online service, HMRC calculates how much tax you have overpaid and then offsets any additional tax you owe against it.
• At the end of the process your net tax position for the year is adjusted. If you have overpaid the balance can be refunded to your bank account as a tax rebate, or you can choose to pay less tax each month in the next financial year through a new tax code. If you still owe some tax, you can choose to make a single payment from your bank account or pay in instalments from your salary, again through a revised tax code. If you use the paper-based service, the process is similar but takes longer.
• You can also call or write to HMRC in respect of higher rate tax relief. If you are employed, the relevant address will be on your P60 or payslip. It is worth noting that you will need to submit a new letter every time you alter your pension contributions or your salary changes, so Self Assessment could be a more convenient route if you are likely to remain in the higher rates of tax, though it will take longer to get the relief.
• If you have previously missed out on relief through not claiming, you can make backdated claims for higher rate tax relief on your pension contributions for the past four tax years.

Please note that for workplace pensions offering ‘salary sacrifice’ or ‘net pay’ arrangements, all the tax relief, including higher and additional rates, is automatic. That’s because it has the effect of reducing salary, with the specified amount of pay diverted into a pension instead. Similarly, with defined benefits schemes such as final salary pensions there is usually no relief to be claimed because personal contributions are made to the scheme from gross rather than net pay.

How much can you contribute to a pension?

The generosity of tax relief comes with limits. Contributions that attract tax relief are restricted to 100% of your relevant UK earnings – essentially earned income rather than any other form of income such as dividends or interest. Contributions, including those paid by your employer, are also subject to an ‘annual allowance’, which is usually £60,000 gross (that is, including the tax rebates).

Very higher earners get a lower annual allowance, which could limit their maximum contribution to as little as £10,000 a year. The rules on when this ‘tapered annual allowance’ kicks in are complicated. Broadly, it doesn’t affect people with income and benefits of less than £200,000 a year, but HMRC has more information on how to calculate it here.

For people who receive ‘flexible’ retirement benefits, such as a flexi-access pension (e.g. pension drawdown or taking more than 25% cash from their pension), a lower annual allowance of £10,000 applies.

If you haven’t used your full annual allowance from up to three previous years, you might be able to carry it forward and use it in the current tax year provided your earnings are high enough and you have been a member of a registered pension scheme in those preceding years. People earning more than £60,000 who wish to maximise pension contributions may be able to take advantage of this. Additional guidance and examples can be found on the government’s Money Helper website.

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