Higher rate taxpayers without a pension are missing out on more than £2,500 each in tax relief, according to new research.
Around 10% of high earners do not contribute to a pension in the UK, says financial firm The Prudential.
The study showed that the average higher rate taxpayer – that’s someone paying income tax at a rate of 40% – earns £63,000 a year.
Those saving by making extra payments into a defined contribution company pension pay in an average £523 a month and pick up £200 pension contribution relief adding more than £2,500 a year to their retirement savings.
“Higher rate taxpayers can claim tax relief at 40% on their pension contributions, but as the net widens and captures more pension savers, a growing number seem unaware of this valuable benefit,” said Clare Moffat, a tax specialist at The Prudential.
Incentive to save
Taxpayers start paying income tax at 40% on earnings between £41,866 and £150,000.
Below £41,866, the pension contribution relief rate is 20% and above £150,000, the rate rises to 45%.
Pension contribution relief is paid on a maximum £40,000 paid into the scheme each financial year.
“Having a high income does not mean someone should expect a comfortable retirement if they are not making pension savings,” said Moffat. “Pension contributions are topped as an incentive to save, but a considerable number of people either do not realise they can gain this extra cash as tax relief.”
Higher rate and top rate taxpayers paying income tax at 40% or more do not receive the full top-up, just the automatic 20%. To claim the rest of the relief, they have to file a self-assessment tax return each January.
The exception is occupational pensions, which top up contributions at the taxpayer’s marginal rate of income tax.
Unaware cash was available
However, anyone paying into personal pensions, like a self-invested personal pension, group pensions or stakeholder schemes must file their tax return to get the extra cash.
The Prudential research also revealed 60% of higher rate taxpayers in defined contribution group pension schemes do not benefit from the full pension relief top-up – and 15% had no idea they could claim the extra money.
Another 6% could make extra pension contributions and claim more tax relief, but are either unaware of the benefit or ignore the financial opportunity.
The company has estimated that a total of £225 million a year in potential pension contribution relief is available but unclaimed by higher rate taxpayers.