Pensions and tax relief

Are you wasting the opportunity to reduce your tax bill?

We all know that putting into your pension is good for us. Not only is it good in terms of ensuring that you have an income or money to draw on in retirement but it is also good for us today as it reduces the amount of tax we pay to the Tax man today.

But are you claiming the tax back? Are you potentially leaving money on the table with the tax man? Are you overpaying your tax?

Most people will look at these questions, shrug their shoulders and assume that their employer is sorting all of this out via PAYE or another form of automatic tax payment system. However, if you are a higher rate or additional rate tax payer and putting into a pension scheme then this is unlikely to be true.

For most basic rate tax payers 

You will (hopefully) know that the government gives back any tax paid on pension contributions and uses it to top up your pension of you are a basic rate tax payer. This means that for every £80 you put into your pension the government tops up the pension pot to the tune of £20. This process occurs automatically via PAYE (assuming that this is the way that you pay your income taxes).

Are you a higher rate or additional rate tax payer?

If you are a higher rate tax payer then the government will actually give you back the additional tax paid. So for every £60 that you put into your pension the government will top up the pension via PAYE to the tune of £20 and then there is an additional £20 available to claim by the individual. This additional £20 can be used to offset against your tax bill. However, many people do not realise that in order to benefit from this additional amount you must fill out a self assessment form. If you do not fill out the self assessment form then you won't receive the tax back and will have lost the opportunity to legally pay less tax. This issue is even more accute for additional rate tax payers who are potentially foregoing £25 in additional tax relief for every £55 put into a pension.

Remember: if you're a higher rate or additional tax payer in the UK and are putting into a pension you must claim back the additional tax relief via a self assessment form. Otherwise you are throwing away money!

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