Higher-rate taxpayers could be missing out on £97,000 in pension wealth

• This assumes an initial £10,000 contribution, increased annually by 2% (the inflation target), in a pension achieving growth of 5% per annum over 20 years
• You can claim back any missing tax relief not only for the current tax year but also for the previous three tax years.

With the self-assessment deadline rapidly approaching (31 January), new calculations by interactive investor reveal that higher-rate taxpayers could be missing out on additional pension wealth worth over £97,000 by failing to complete a self-assessment tax return.

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While 20% tax relief is automatically applied to pension contributions, higher-rate taxpayers can reclaim an additional 20% tax relief on their contributions (for a total of 40%) through a self-assessment tax return. Additional-rate taxpayers can claim an extra 25%, bringing their total tax relief to 45%.

interactive investor’s calculations show that a higher-rate taxpayer paying £10,000 into a private pension in a single tax year would miss out on £2,500 by failing to claim their full pension tax relief. Over 10 years, this would result in £34,158 in lost pension wealth, rising to £97,278 over 20 years.

This assumes the additional tax relief is reinvested in a pension achieving 5% annual growth (net of fees), with contributions increasing by 2% per year (in line with the inflation target).

The same principle applies to smaller contributions. For example, a higher-rate taxpayer contributing £5,000 in year one and increasing the contribution by 2% annually could boost their pension pot by £17,079 over 10 years and £48,639 over 20 years, provided the rebate is reinvested into their pension (under the same assumptions).

For an initial contribution of £2,000, the figures are £6,831 over 10 years and £19,455 over 20 years.

Source: interactive investor. Assumes 5% investment growth and 2% uptick in annual pension contributions. Applies to higher rate tax payers only.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Not claiming the additional pension tax relief is a significant financial own goal - one that could have a lasting impact on your quality of life in retirement.

“Claiming the additional tax relief available to higher-rate taxpayers through a self-assessment tax return can supercharge your pension savings over the long term. By reinvesting this extra relief back into your pension, you not only bolster your retirement pot but also harness the power of compounding growth.

“Each additional contribution benefits from tax-efficient growth over the years, potentially leading to a significantly larger pension fund by the time you retire. It’s a smart strategy to maximise the advantages of both tax relief and long-term investment returns, ensuring your money works as hard as you do.

“Understandably, many people don’t realise there are extra steps required to claim the full 40% tax relief. If you don’t normally complete a tax return, you can still write to HMRC with details of any private pension contributions you’ve made during the year to claim the additional tax relief.

“For higher-rate taxpayers contributing to a relief-at-source workplace pension scheme, it’s important to note that the extra tax relief isn’t applied automatically - you’ll need to claim it yourself. Additionally, you can claim back any missing tax relief not only for the current tax year but also for the previous three tax years, ensuring you don’t miss out on what you’re entitled to.”