Imagine missing out on a £1,700 tax refund every year without even realizing it. Shockingly, this is the reality for nearly 800,000 pension savers in Britain. But here's where it gets even more surprising: many of these individuals are higher earners who simply aren't aware they’re leaving this money on the table. New research reveals that these savers, often paying into personal pensions, are failing to claim substantial tax refunds because they either overlook pension details on their tax returns or don’t file returns at all.
The issue primarily affects those whose taxes are handled through PAYE (Pay As You Earn), meaning they aren’t required to submit a tax return. And this is the part most people miss: by voluntarily filing a tax return, these individuals could unlock significant refunds on their pension contributions. Freedom of Information data, obtained by Steve Webb of pension consultants LCP, highlights that over £1 billion in pension tax relief goes unclaimed annually. This happens because many higher earners contribute to pensions using the 'relief at source' system but fail to claim the additional tax relief they’re entitled to.
Here’s how it works: under the relief at source system, HMRC automatically adds basic rate tax relief (20%) to pension pots. For example, an £800 payment from your take-home pay becomes £1,000 in your pension pot. However, if you’re a higher rate taxpayer (40% or 45%), you’re eligible for an additional 20% or 25% relief—but this isn’t automatic. You must actively claim it, typically by declaring your contributions on a self-assessment form. But here’s the controversial part: why isn’t this process more streamlined? Shouldn’t higher earners be automatically notified of their eligibility for additional relief?
HMRC figures show that the average pension contribution declared on tax returns is £8,782, meaning higher rate taxpayers could reclaim £1,756 on average. Yet, in 2023/24, only 316,000 higher rate taxpayers claimed this relief, despite an estimated 1.1 million being eligible. That leaves around 807,000 people missing out. Even among additional rate taxpayers, the gap is significant, with 151,000 claiming out of an expected 170,000.
The situation is worsening as frozen tax thresholds push more workers into higher tax bands. By 2025/26, the number of higher and additional rate taxpayers is expected to rise to 8.3 million, up from 6.9 million in 2023/24. Steve Webb emphasizes, 'With more people being dragged into higher tax rates, it’s crucial they claim all the relief they’re entitled to. Anyone saving into a personal pension or 'relief at source' scheme can get higher rate relief—but only if they claim it.'
Here’s a thought-provoking question: Is the system failing these savers by not making the process more transparent or user-friendly? Or is it the responsibility of individuals to stay informed and proactive about their finances?
Pension savers are also reminded that they can submit backdated claims for up to four years. So, if you’ve missed out in the past, it’s not too late to reclaim what’s rightfully yours. When filing your tax return, don’t overlook the box for personal pension contributions—enter the gross amount contributed to trigger your refund. For higher rate taxpayers, this could mean an average refund of over £1,700, and for additional rate taxpayers, over £2,000.
What’s your take? Do you think the system needs to do more to help savers claim their relief, or is it on individuals to take the initiative? Share your thoughts in the comments below!
