More than one in four higher-rate taxpayers don't claim higher rate tax relief on their pension contributions. But this means that they are missing out on average to the tune of £1,255 a year in tax relief.
Over long investment periods, the effects of the missing tax relief will compound up, meaning potential big losses in retirement income.
Figures from Candid Money show that a £1,000 contribution to a pension with upfront higher rate tax relief invested over 20 years with 6 per cent annual growth would become £5,345 compared to £4,009 from the same amount invested with just basic rate relief. That's an uplift of 33 per cent in pension pot - and the subsequent gross retirement income.
How a £1,000 contribution to a pension performs for different tax rates
| Non-taxpayer | Basic-rate taxpayer | Higher-rate taxpayer | |
| £1,000 contribution with tax relief | £1,250 | £1,250 | £1,667 |
| Value after 20 years at 6% annual growth | £4,009 | £4,009 | £5,345 |
| Annual retirement income (assume 5%) | £200 | £200 | £267 |
| Annual retirement income after tax | £200 | £160 | £160 |
Source: Candid Money. Figures based on current tax rates, these could change in future.
The new research from Prudential estimates that 182,500 higher-rate taxpayers fail to maximise their tax relief on pensions, with around £229m going unclaimed.
But this sum could be higher as 15 per cent of higher-rate taxpayers with defined contribution pension schemes do not know whether they are claiming the relief or not.
The March 2013 Budget lowered the starting point for paying higher-rate tax at 40 per cent from £42,475 to £41,451. This potentially meant more employees paying into defined contribution personal pension schemes could be eligible for higher-rate tax relief.
Income tax rates and taxable bands
| Rate | 2011-12 | 2012-13 | 2013-14 |
| Personal Allowance (no tax)* | £7,475 | £8,105 | £9,440 |
| Basic rate tax: 20% | £0-£35,000 | £0-34,370 | £0-£32,010 |
| Higher rate tax: 40% | £35,001-£150,000 | £34,371-£150,000 | £32,011-£150,000 |
| Starting point for paying higher rate | £42,475 | £42,475 | £41,450 |
| Additional rate: 50% | Over £150,000 | Over £150,000 | na |
| Additional rate: 45% from 6 April 2013 | na | na | Over £150,000 |
*For people born after 5 April 1948. The Personal Allowance reduces where the income is above £100,000 - by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age or date of birth.
Members of occupational pension schemes receive basic and higher-rate relief automatically through their payroll. But members of personal pension schemes, including group personal pension schemes (GPPs), self-invested personal pensions (Sipps) and stakeholder pensions only receive basic rate 20 per cent tax automatically. They need to claim the additional relief through their annual tax return or by informing HM Revenue & Customs.
Higher-rate taxpayers should check whether they are claiming the maximum they are entitled to and to reclaim any tax relief they have missed out on in the past. Those who fill in an annual self-assessment tax return can make claims for contributions paid as far back as the 2011-12 tax year. Those who do not fill in tax returns can claim as far back as the 2009-10 tax year, but the deadline for this is October 31.
